Tuesday, 30 August 2016

P. 1

Rates: Hawkish Fed speak and stronger US eco data?

Fed vice-chair Fischer will likely repeat in a TV interview today that he prefers a September rate hike if Friday’s payrolls don’t disappoint. That should weigh on US Treasuries especially with risks to US consumer confidence on the upside of expectations.

Currencies: Dollar loses its post-Brexit gains

No follow through gains for the dollar yesterday, which is a slight disappointment for the dollar bulls. Eco data may be intrinsically dollar positive, but it will likely be vice-chair Fischer who will decide on the direction of the dollar. Will he continue his hawkish crusade?

Calendar

• In thin trading conditions, US Equities rose 0.5% yesterday, led by gains in financials. This morning, Asian shares trade in positive territory. Japanese stocks underperform, trading broadly unchanged on mixed data.

• Japan’s unemployment rate dropped unexpectedly in July, from 3.1% to 3.0%, the lowest level since 1995. Despite the low unemployment rate, separate data showed both retail sales and consumer spending dropped further, although less than expected.

• Spain’s Socialist leaders said his party would not back acting PM Rajoy’s re-election after meeting him for the final time before tomorrow’s confidence vote in parliament. If Rajoy loses tomorrow’s confidence vote, a second will be held on Friday where a simple majority would suffice.

• Japan’s top government spokesman Suga said the government is watching market moves carefully and is ready to respond “appropriately”. He also defended the BOJ’s negative interest rates, saying such steps would benefit financial institutions if they help improve the economy.

• The Chinese yuan gains slightly from its six-week low against the US dollar yesterday as the dollar lost some momentum after US yields dropped lower again.

• Today, the eco calendar contains the first estimate of the German, Spanish and Belgian inflation data for August, the EC’s confidence indicators, US S&P CS house prices and Conference Board’s consumer confidence. Fed’s Fischer will hold a Bloomberg television interview.

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

Tuesday, 30 August 2016

P. 2

Jackson Hole comments fall on deaf ears

Core bonds regained most (US) / all (Germany) ground yesterday following Friday’s losses prompted by hawkish comments of Fed chairwoman Yellen and vice-chair Fischer at Jackson Hole. Trading was technically in nature given the thin eco calendar (near consensus US income/spending data & PCE) and the absence of UK traders (low volumes). End of month extension buying may have played a role. Nevertheless, it’s surprising that Fed’s hawkish comments fall on deaf ears this fast. At the end of the session, the US yield curve bull flattened with yields 3.7 bps (2-yr) to 7.3 bps (30-yr) lower. Changes on the German yield curve ranged between -0.5 bps (30-yr) and -1.2 bps (5-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany ended unchanged. Spanish bonds didn’t outperform on the PP-Ciudadanos deal. PM Rajoy will put this coalition proposal up for a confidence vote in parliament later this week, but the Socialist party is expected to shoot the bid down instead of abstaining.

Interesting EMU eco calendar The eco calendar is interesting today, especially in the euro area with the first estimate of German HICP inflation for August and the European Commission’s confidence indicators. In the US, Conference Board’s consumer confidence and S&P CS home prices will be released. On the supply front, Italy (BTP & CCTeu) will tap the market.

In August, German HICP inflation is expected to extend its upward trend, rising from 0.4% Y/Y to 0.5% Y/Y. On a monthly basis, inflation is expected to rise by 0.1% M/M, but we see risks for a downward surprise due to the pass through of the oil price drop in July. Ahead of the national data, the regional figures will already give an indication. Still in the euro area, European Commission’s economic confidence is expected to have weakened in August with the consensus looking for a drop from 104.6 to 104.1. We believe however that the risks are for a lower outcome following a weaker IFO and marginally weaker PMI’s, while also the first estimate of August consumer confidence surprised on the downside. While the first impact of the Brexit was limited, the second thought is apparently less positive. In the US, Conference Board’s consumer confidence is expected little changed in August, at 97 from 97.3 in July. Most recent data showed a mixed picture with the Bloomberg indicator rebounding sharply and U. of Michigan consumer confidence unchanged. We believe however that the risks for the Conference Board’s indicator are on the upside after strong labour market data recently and record high equity markets.

Rates

US yield -1d2 0,821 -0,02775 1,1944 -0,040510 1,5851 -0,037730 2,2327 -0,0375

DE yield -1d2 -0,6310 -0,02305 -0,5090 -0,033010 -0,0520 -0,012030 0,4696 0,0111

US Note future (orange) and S&P future (black) intraday (two days): both erase post-FOMC losses

US 2-yr/10-yr yield spread at lowest level since 2007

Friday’s losses undone in thin, technical trade

Disappointing European data, but upward surprise US consumer confidence?

Tuesday, 30 August 2016

P. 3

Plain vanilla BTP auctions?

The Italian debt agency taps the on the run 5-yr BTP (€2.5-3B 0.45% Jun2021) and 10-yr BTP (€2.5-3B 1.25% Dec2026). Both bonds didn’t really cheapen in ASW spread terms going into the auction and especially the 10-yr BTP trades rather rich on the Italian curve. The amount on offer is relatively low though and the auctions will be supported by a €13.8B Italian redemption. Therefore, we expect a plain vanilla auction. Additionally, the debt agency intends to raise €1.25-1.75B by tapping a floating rate CCTeu.

Big week for US Treasuries

Overnight, most Asian equity markets trade in positive territory in line with WS’s rebound yesterday evening. Japanese stocks underperform and remain near opening levels despite better than expected eco data and a slightly weaker yen. The US Note future cedes some ground suggesting positive risk sentiment at the onset of European dealings which could lead to a lower opening of the Bund.

Today’s eco calendar contains German CPI data, EC confidence indicators and US consumer confidence. From a market point of view, the latter will be most important. Risks are on the upside of expectations, which is a negative for US Treasuries. Ahead of the data and likely amplifying the market impact from a positive surprise, Fed’s vice-chair Fischer will be giving a TV interview. He will likely repeat his thoughts that September is the perfect moment to hike rates if Friday’s payrolls don’t disappoint. Our preferred scenario is a September rate hike. If confirmed by incoming eco data and/or Fed speak, this should weigh on US Treasuries and trigger a further (bear) flattening of the US yield curve.

Despite yesterday’s technical rebound, we expect that the US Note future could break below strong support (130-25+) in case of good payrolls on Friday. This would deteriorate the technical picture and pave the way to the April low (128-28+). The Bund will take a similar direction as the Note future, but the sideways range between 168.54 and 165.68 looks safe.

R2 170 -1dR1 168,86BUND 167,59 0,6300S1 165,63S2 163,61

German Bund: sideways range between 165.63 and 168.86 remains intact

US Note future: Strong payrolls should be able to push contract below 130-25+ support

Tuesday, 30 August 2016

P. 4

Dollar fails to hold on to the post Jackson Hole gains

Yesterday, the dollar initially gained more ground against euro and yen, but gave back most gains during the US session devoid of surprising eco data (US PCE/PI were constructive but in line with expectations). Initially, follow up dollar buying in a thin market pushed EUR/USD from opening levels around 1.12 to an intraday low of 1.1160, but the tide turned around the European close pushing the pair to a close of 1.1189, virtually unchanged from Friday eve. Similarly, USD/JPY rose from 101.84 to a high of 102.38 at the start of European trading, helped by dovish talk at Jackson Hole by BOJ governor Kuroda. The pair eased a bit during European morning trading, tried to regain the highs, but finally succumbed to renewed dollar selling and closed at 101.92, barely higher than Friday’s closure, despite positive risk sentiment. Two factors played against the dollar in the final part of an otherwise thinly traded unattractive session. US Treasuries recouped Friday’s losses as yields dropped between 3.7 (2-yr) and 7.6 (7-yr) bps. So, the rate differential narrowed (especially euro supportive). It seems that bond investors continue to revolt/resist against the Fed’s attempts to move to a slight tightening of policy. However, it might still change if by the end of the week as the US labour market data would be strong.

Overnight, Asian equities are slightly positive, but post mostly no more gains than Wall Street yesterday. The T-Note future on the contrary loses quite some ground, suggesting that yesterday’s recovery might not be the end of the story. The dollar is slightly up against euro and yen and trades at 1.1173 (EUR/USD) and 102.16 (USD/JPY). Aussie and Kiwi dollars are little changed, but the Korean won strengthened. Most other Asian currencies are slightly lower versus the dollar. There are signs from the derivative markets that Yuan bears are starting to roar their head as Fed policy may tighten, but we expect only moves after the G-20 meeting that takes place in China.

German and US data in the picture

In August, German HICP inflation is expected to extend its upward trend, rising from 0.4% Y/Y to 0.5% Y/Y. On a monthly basis, inflation is expected to rise by 0.1% M/M, but we see risks for a downward surprise due to the pass through of the oil price drop in July. Still in the euro area, European Commission’s economic confidence is expected to have weakened in August with the consensus looking for a drop from 104.6 to 104.1. We believe however that the

Currencies

R2 1,1428 -1dR1 1,1366EUR/USD 1,1167 -0,0032S1 1,1046S2 1,0992

Dollar tries to eke out more gains but fails, as equities are strong and rate differentials narrow again.

EUR/USD and USD/JPY little changed on the day

EUR/USD: No follow through dollar gains, but remains below uptrendline

USD/JPY: stays currently away from 100 level, but move above 105.23 is needed to become outright dollar bullish

Downside risks EMU figures & upside risk US data in theory dollar positive

Tuesday, 30 August 2016

P. 5

risks are for a lower outcome following a weaker IFO, marginally weaker PMI’s, and downside surprising August consumer. While the first impact of the Brexit was limited, the second thought is apparently less positive. In the US, Conference Board’s consumer confidence is expected little changed in August, at 97 from 97.3 in July. Most recent data showed a mixed picture. We believe however that the risks for the Conference Board’s indicator are on the upside after strong labour market data recently and record high equity markets.

Fed Fischer speaks at Bloomberg around noon. He pushed the case for a near term rate hike the hardest at Jackson Hole and even interpreted Yellen’s words into a more hawkish sense (than she had maybe wanted to do). Will Fischer continue his quest to influence markets towards a more hawkish stance on rates? He might be the most important impetus for the FX (and rates) markets today. The eco data might be dollar positive, but unlikely to be of any major impact. Investors are focussed on US labour market data and these will be published from tomorrow onwards. Despite yesterday’s setback, we wouldn’t leave our positive dollar bias yet. Of course, we would like to see an improvement in the technical picture. In this respect EUR/USD has key support at 1.1070/46 and 1.0992. The break below the uptrendline (see graph) is a first minor USD positive. USD/JPY’s first key resistance stands at 105.23.

Sterling loses slightly against euro and dollar

In the absence of UK investors, sterling modestly lost ground against the dollar and euro. EUR/GBP very gradually erased most of Friday’s losses to close at 0.8537 from 0.8524 on Friday eve. Cable dropped to 1.3106 from 1.3137 previously. Both pairs were off intra-day sterling lows. The moves were inspired by what occurred in EUR/USD. We didn’t see any independent move, which wasn’t surprising with an empty calendar and the UK market holiday. Worth mentioning, future statistics showed that by last Tuesday, bets against sterling (shorts) increased to a record high. In a longer perspective, EUR/GBP stabilizes close to the highs, awaiting new impetus. Cable is in a sideways range between 1.28 and 1.35 since the Brexit.

Today, the EMU data may disappoint, while US consumer confidence may surprise on the upside. In the UK, the July lending data are up for release, while the BoE publishes the results of its long term repo-operation and of its asset purchases. As retail sales were strong, so might be consumer credit. On the other hand, loans for housing and mortgage approvals may disappoint, as this sector is probably hit the most by Brexit. The consensus however expects already serious decline in approvals. All in all we may see some losses for cable (GBP/USD) and gains for EUR/GBP, but the very short sterling position and the scope of the earlier losses makes us a bit reticent to set up new sterling shorts at this point. We stay cautiously negative on sterling longer term, but it seems too early to expect another big negative move in sterling.

R2 0,8815 -1dR1 0,8725EUR/GBP 0,8539 0,0003S1 0,8344S2 0,8251

EUR/GBP: stabilize new highs

GBP/USD: holding in a tight range

Tuesday, 30 August 2016

P. 6

Tuesday, 30 August Consensus Previous US 15:00 S&P CoreLogic CS 20-City MoM YoY (Jun) -0.1%/5.1% -0.1%/5.24% 16:00 Consumer Confidence Index (Aug) 97.0 97.3 Canada 14:30 Current Account Balance (2Q) -- -$16.77b Japan 01:30 Jobless Rate (Jul) 3.1% 3.1% 01:30 Job-To-Applicant Ratio (Jul) 1.38 1.37 01:30 Overall Household Spending YoY (Jul) -1.5% -2.2% 01:50 Retail Sales MoM YoY (Jul) 0.8% / -0.9% 0.2% / -1.4% 01:50 Dept. Store, Supermarket Sales (Jul) 0.9% -1.5% UK 10:30 Net Consumer Credit (Jul) 1.7b 1.8b 10:30 Net Lending Sec. on Dwellings (Jul) 3.2b 3.3b 10:30 Mortgage Approvals (Jul) 61.9k 64.8k 10:30 Money Supply M4 MoM YoY (Jul) -- 1.1% / 3.5% EMU 11:00 Economic Confidence (Aug) 104.1 104.6 11:00 Business Climate Indicator (Aug) 0.37 0.39 11:00 Industrial Confidence (Aug) -2.6 -2.4 11:00 Services Confidence (Aug) 11.2 11.1 11:00 Consumer Confidence (Aug F) -8.5 -8.5 Germany CPI Baden Wuerttemberg MoM YoY (Aug) -- 0.3% / 0.3% 08:00 Import Price Index MoM YoY (Aug) -0.1%/-4.0% 0.5%/-4.6% 09:00 CPI Saxony MoM YoY (Aug) -- 0.3% / 0.5% 10:00 CPI Brandenburg MoM YoY (Aug) -- 0.5% / 0.2% 10:00 CPI Hesse MoM YoY (Aug) -- 0.4% / 0.2% 10:00 CPI Bavaria MoM YoY (Aug) -- 0.2% / 0.6% 10:30 CPI North Rhine Westphalia MoM YoY (Aug) -- 0.2% / 0.5% 14:00 CPI MoM YoY (Aug P) 0.1% / 0.5% 0.3% / 0.4% 14:00 CPI EU Harmonized MoM (Aug P) 0.1% / 0.5% 0.4% / 0.4% Italy 10:00 Retail Sales MoM YoY (Jun) -0.2% / 0.1% 0.3% / -1.3% Belgium CPI MoM YoY (Aug) -- 0.1% / 2.3% Spain 09:00 CPI EU Harmonised MoM YoY (Aug P) 0.0% / -0.3% -1.3% /-0.7% Switzerland 09:00 KOF Leading Indicator (Aug) -- 102.7 Events 11:40 BOE Indexed Long-Term Repo Operation Results 12:30 Fed’s Fischer Speaks on Bloomberg Television 15:50 Bank of England Bond-Buying Operation Results Italy BTP Auction (€2-3B 0.45% Jun2021, €2.5-3B 1.25% Dec2026) & CCTeu (€1.25-

1.75B Jul2023) Auction

Calendar

Tuesday, 30 August 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 1,59 -0,04 US 0,82 -0,03 DOW 18503 18502,99DE -0,05 0,02 DE -0,63 -0,02 NASDAQ for Exch - NQI #VALUE!BE 0,16 -0,05 BE -0,59 -0,03 NIKKEI 16725 16725,36UK 0,57 0,00 UK 0,13 -0,02 DAX 10544,44 10544,44JP -0,07 -0,01 JP -0,21 -0,02 DJ euro-50 2999 2998,50

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,345 -0,0023y -0,189 1,098 0,452 Euribor-1 -0,37 0,00 Libor-1 USD 0,28 0,285y -0,125 1,200 0,502 Euribor-3 -0,30 0,00 Libor-3 USD 0,39 0,3910y 0,280 1,421 0,716 Euribor-6 -0,19 0,00 Libor-6 USD 0,52 0,52

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,1166 -0,0034 EUR/JPY 114,13 -0,45 184,4342 1321,77 49,38USD/JPY 102,22 -0,11 EUR/GBP 0,854 0,0003 - 1d -1,68 3,33 0,07GBP/USD 1,3069 -0,0045 EUR/CHF 1,0952 0,0009AUD/USD 0,7563 0,0017 EUR/SEK 9,475 -0,02USD/CAD 1,3030 0,0024 EUR/NOK 9,2565 -0,02