Thursday, 08 September 2016

P. 1

Rates: Limited impact ECB meeting?

The Bund gained this week in the run-up to today’s ECB meeting with a first test of 165.63 resistance yesterday. There’s some room for disappointment as we expect Draghi to postpone policy decisions to Q4 2016, but any down leg should be shortlived.

Currencies: EUR/USD holding stable ahead of ECB policy decision

Yesterday, the dollar held in very tight ranges against the euro and the yen after Tuesday’s post-ISM sell-off. Today the focus is on the ECB policy decision. We expect the ECB to stay in a soft wait-and-see modus. No concrete indication on extending QE might be temporary euro supportive. Sterling corrects off the recent highs as Carney defends the BoE’s Brexit approach.

Calendar

• US Equities reversed early losses to end the session mixed as losses in

consumer-staples were offset by gains in most other sectors. This morning, also Asian shares trade mixed.

• The US economy continued to expand at a modest pace in July and August with respondents saying they expected growth to continue at a moderate pace in the coming months, the Fed’s Beige Book showed yesterday. Most districts cited tight labour markets with wage pressures continuing to build, but the pick-up in wages did not translate into significant inflation pressure.

• Chinese imports (in $ terms) rose unexpectedly in August, for the first time in nearly two years, while exports dropped at a more modest pace, providing hope that demand abroad and at home is finally picking up.

• BoE Governor Carney fended off criticism from lawmakers that the Bank moved too aggressively to help Britain’s economy through the Brexit shock saying he absolutely feels comfortable with the decision they took in August, but added that the damage to the economy looked a bit less severe than the BoE had forecast at that time.

• The Bank of Canada decided yesterday to keep its monetary policy on hold, but provided a bleaker than expected economic assessment saying that the economy could be weaker than it anticipated just two months ago as exports disappointed. The Canadian dollar weakened after the decision.

• After already a 1.6% gain yesterday, crude oil prices extend their rebound this morning with the Brent hovering around $48.75/barrel after API data showed the largest weekly drawdown in crude stocks over three decades.

• Today, the focus will be on the ECB meeting, while in the US only the jobless claims will be released.

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

Thursday, 08 September 2016

P. 2

Bund tests highs in technically-inspired trading

Yesterday, global core bonds had a sideways oriented session with the Bund trading with a positive bias and US Treasuries ending with marginal losses in a session devoid of important eco news or events. The Bund tested the contract high (post-Brexit) at 165.63 (165.67 intraday high), but the test didn’t succeed and the Bund closed at 165.56, a modest 24 ticks gain on the day. Weak German production data and an awful Bund auction had little to no impact, neither had equities nor oil. Some late pre-positioning on a (dovish) ECB outcome may have played a role. US Treasuries had a broad sideways trading session that ended with minor losses. The sideways trading was briefly interrupted by a spike higher in early session, but the gains faded fast, maybe helped by stronger Jolts job openings. The Beige book’s tone was a bit downbeat versus the previous one, but without being of great concern. In a daily perspective, the German curve bull flattened with yields up to 2.3 bps (30-yr) lower. The US curve traded erratic with yields up between 0.5 bps and 1.4 bps. No meaningful changes in the intra-EMU bond market.

ECB meeting highlight of the day ECB members have largely remained silent during the holidays, giving markets no guidance on the way the September meeting may develop. In July, ECB president Draghi had said that the ECB would monitor “very” closely economic and financial conditions and stressed the importance of the September ECB staff projections. The financial conditions have been broadly similar than pre-Brexit, meaning that the current outfall of Brexit on the financial markets and the economic situation hasn’t been material. Growth has continued at about a similar pace as in H1. The staff projections for growth and inflation might remain unchanged for 2016 and as best only slightly lowered for 2017/18 due to some Brexit outfall. In this respect, it doesn’t look savvy for the ECB to additionally ease policy by lowering rates or by increase purchases, extending the period of asset purchases or include new asset classes. That should be left for eventually the Q4 (December?) meetings. The ECB might feel the need though to tweak the conditions attached to the sovereign bond purchases, as scarcity of eligible bonds for some countries will soon lead to problems (see our flash for full coverage ). Of course, Draghi will keep the door open for additional measures to be decided at likely the December meeting. He needs to avoid a possible unwarranted euro strengthening, if the Fed would stand put at its September policy meeting.

Rates

US yield -1d2 0,738 0,00405 1,125 0,004910 1,5374 0,001730 2,2313 0,0057

DE yield -1d2 -0,6610 0,01305 -0,5650 -0,002010 -0,1190 -0,003030 0,4200 -0,0127

Bund future (orange) and EuroStoxx (black) intraday: Both upwardly oriented intraday, with test highs Bund, but modest gains at the end.

Euribor 3 m strip curve: Still slight expectations for 10 bps rate cut but not now

Bund tests contract high

Sideways pre ECB trading session

Minor gains for Bunds and minor losses for US Treasuries

No additional policy easing, but conditions for bond buying might be tweaked.

ECB staff projections at best only slightly lowered for 2017/18.

Thursday, 08 September 2016

P. 3

Draghi knows the ECB policy has still few bullets left, which might be of use later on. Therefore he might up his campaign to incite the governments to come to the rescue with fiscal and structural policy measures to help growth strengthen (growth which is now unsatisfactory low).

Ireland concludes EMU bond supply

The Irish debt agency taps the on the run 10-yr IGB (€1B 1% May2026). The NTMA aims to raise up to €1B. The bond traded stable in ASW spread terms going into the auction, but is rather expensive at the very long end of the Irish curve. Overall, we expect a plain vanilla auction.

ECB: Paving the way for action in Q4 2016?

Overnight, most Asian equity markets trade with slim losses. Brent crude and the US Note future trade stable. We expect a neutral Bund opening.

The focus of today’s trading session is the ECB meeting. We expect Draghi to keep a soft tone, backed by marginally weaker growth and inflation forecasts, but he’ll probably defer any communication on the end of the QE-programme to Q4. Changes to the eligibility criteria for PSPP are possible in order to enlarge the pool of available assets. Such scenario should only have a muted impact on markets. The past two sessions, the Bund anticipated a slightly softer ECB stance, leaving room for some disappointment. However, we don’t expect any down-leg to go far given the ECB’s easing bias.

Technically, the US Note future broke above this month’s downward trend line, suggesting a move towards 132-05 resistance. Following a batch of weaker ISM’s and slightly disappointing payrolls, odds are now in favour of a December Fed rate hike rather than a September one. The German Bund (Dec contract!) tested the upper bound of this Summer’s sideways trading range (165.63). In yield terms, the German 10-yr yield has more downside (currently -0.11%, but low at -0.20%), .

R2 168,86 -1dR1 165,63BUND 165,51 0,0600S1 163,78S2 163

German Bund (Dec. contract!!): Test of 165.63 high ahead of the ECB meeting

US Note future (Dec contract!!): non-manufacturing ISM pushes US Note future above downtrend line

Thursday, 08 September 2016

P. 4

Dollar holds stable going into ECB policy decision

On Wednesday, there was absolutely no news to guide USD trading. There was also no follow-through price action on Tuesday’s post-ISM USD selling. EUR/USD held a tight range in the mid 1.12 area. USD/JPY hovered in the mid 101 area. The tone of the Fed Beige Book turned a bit softer, but with no lasting impact on the dollar. EUR/USD closed the session at 1.1239 (from 1.1255 on Tuesday). USD/JPY finished the day at 101.74, off the intraday low (101.21) reached in Asia, but still down from Tuesday’s close (102.02).

Overnight, most Asian equity indices trade with modest losses. Selective profit taking on a recent good performance looks like the most evident explanation. Japanese equities continue to underperform as the yen holds near the recent highs. There is also plenty of market chatter of PBOC action to counter speculative bets on a further weakening of the yuan. The August China trade surplus rose less than expected, but the details were constructive with both exports and imports rising more than expected. USD/JPY trades marginally higher in the 101.65 area. EUR/USD is little changed near 1.1250.

Today, the calendar is thin except for the ECB policy decision and the press conference from president Draghi. In the US, the initial jobless claims are scheduled for release. Initial claims are expected marginally higher at 265 000. We see risks for a slightly better/lower figure. However, the report won’t remove the doubts after recent disappointing US data. The impact on the dollar should be limited, especially as the market focus will be on the ECB press conference. For the in debt analysis/preview on the ECB meeting see our ECB flash report. The ECB will keep a soft tone. The growth and inflation forecasts might be revised marginally lower. We expected the ECB to defer the announcement to extend (or end QE) to Q4. At the same time, the ECB might announce some technical measures to extend to pool of PSPP eligible assets. If, this scenario comes true, the market reaction might be guarded. If Draghi gives no hint on an extension of the QE programme yet, this might be temporary supportive for the euro. However, the move shouldn’t go too far. Even after recent US data, the debate on a Fed rate hike isn’t over yet. In a somewhat longer term perspective, this should keep the downside of the dollar well protected.

Currencies

R2 1,1428 -1dR1 1,1366EUR/USD 1,12515 -0,0003S1 1,1123S2 1,1046

Dollar going nowhere after ISM sell-off

EUR/USD: consolidation ahead of ECB policy decision

USD/JPY: returning south in the established range

Thin eco calendar

Focus will be on ECB press conference

ECB to stay soft, but no hint on further QE might be temporary euro supportive

Thursday, 08 September 2016

P. 5

The post-payrolls’ price action on Friday and Monday suggested that sentiment remained USD constructive. However, an awful US non-manufacturing ISM (after a mediocre manufacturing ISM and payrolls) made a September Fed rate hike unlikely. The market hope on a Fed rate hike was the basis of our ST USD positive bias, which has now become fragile. At the same time EUR/USD rebounded to a first resistance at 1.1252. So we change our short-term bias from USD positive to neutral. Range trading in the 1.1123/1.1366 is now favoured. If the ECB stays cautions on further easing, EUR/USD might even return temporary higher in this range. Sentiment on USD/JPY has also changed. Receding chances of a Fed rate hike and uncertainty about the BOJ’s commitment to ease policy further, reversed recent USD gains. The day-to-day momentum also turned negative for USD/JPY, but 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 off recent highs as Carney defends BoE action

On Wednesday, sterling fell prey to modest profit taking. Contrary to what was often the case of late, the UK data missed the consensus. Halifax house prices declined slightly. The miss in July production data was even bigger. Manufacturing production declined 0.9% M/M to be up 0.8% Y/Y (-0.3% M/M and 1.7% Y/Y was expected). The weaker production data were a good reason to book some profit on the recent sterling rally. EUR/GBP rebounded north of 0.84. Cable declined from the 1.3420 area to the 1.3360/65 area. In the afternoon, several BoE members including BoE’s Carney appeared at a hearing before Parliament. BoE’s Carney indicated to feel comfortable with the BoE’s Brexit assessment and with the policy reaction in August. Sterling lost slightly further ground after the BoE hearing. EUR/GBP closed the session at 0.8424 (from 0.8375 on Tuesday). Cable finished the day at 1.3341 (from 1.3440).

Overnight, the RICS house price balance was better than expected at 12% (from 5%). For now there is no positive impact on sterling. Later today, there are no important eco data in the UK. Sterling trading will be driven by global factors and by the reaction (of EUR/USD) to the ECB policy statement/ press conference. In a day-to-day perspective, we see risks for a further correction of sterling off the recent highs.

Sterling had a strong run of late as the UK economy showed remarkable resilience post-Brexit. EUR/GBP declined off the 0.8724 post Brexit top. Sterling momentum remains constructive, but gradually a lot of good news is discounted. To have technical relevance, EUR/GBP should drop below 0.8344/33 and even 0.8251. This is possible, but not so easy. Cable also showed a positive momentum. A first resistance at 1.3372 has been regained. 1.3481/1.35 is key before concluding the bottoming out process after the steep post-Brexit fall is finished. We expect some sterling consolidation/correction on the recent rally.

R2 0,8815 -1dR1 0,8725EUR/GBP 0,8427 0,0042S1 0,8344S2 0,8251

EUR/GBP: rebounds after rejected test of the 0.8340 area

GBP/USD: rally running into resistance .

Thursday, 08 September 2016

P. 6

Thursday, 8 September

Consensus Previous

US 14:30 Initial Jobless Claims 265K 263k 14:30 Continuing Claims 2151K 2159k 21:00 Consumer Credit (Jul) $16.000b $12.320b Japan 01:50 BoP Current Account Adjusted (Jul) A ¥1447.8b ¥1648.4b 01:50 GDP SA QoQ (2Q F) A 0.2% 0.0% 01:50 GDP Annualized SA QoQ (2Q F) A 0.7% 0.2% 01:50 Bank Lending Incl/Ex Trusts YoY (Aug) A 2.0%/2.0% 2.1% / 2.1% 04:00 Tokyo Avg Office Vacancies (Aug) A 3.9 3.94 06:30 Bankruptcies YoY (Aug) A 14.87% -9.52% 07:00 Eco Watchers Survey Current / Outlook(Aug) A 45.6 / 47.4 45.1 / 47.1 China Trade Balance $ / CNY (Aug) A52.B/346B 52.3B/342B Exports YoY / YoY CNY (Aug) A-2.8%/5.9% -4.4% / 2.9% Imports YoY / YoY CNY (Aug) A1.5%/10.8% -12.5%/-5.7% UK 01:01 RICS House Price Balance (Aug) A 12% 5% EMU 13:45 ECB Main Refinancing Rate 0.00% 0.00% 13:45 ECB Deposit Facility Rate -0.40% -0.40% 13:45 ECB Marginal Lending Facility 0.25% 0.25% 13:45 ECB Asset Purchase Target (Sep) EU80b EU80b Germany 08:00 Labor Costs SA QoQ / WDA YoY (2Q) --/-- 1.7%/3.1% France 07:30 Non-Farm Payrolls QoQ (2Q F) A 0.2% 0.2% 08:30 Bank of France Bus. Sentiment (Aug) 98 98 Events 11:00 Irish bond auctions (€1B 1% 2026) 14:30 ECB President Draghi Holds Press Conference

Calendar

Thursday, 08 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 1,54 0,00 US 0,74 0,00 DOW 18526 18526,14DE -0,12 0,00 DE -0,66 0,01 NASDAQ for Exch - NQI #VALUE!BE 0,10 -0,01 BE -0,61 0,01 NIKKEI 16959 16958,77UK 0,68 0,02 UK 0,08 0,00 DAX 10752,98 10752,98JP -0,03 0,02 JP -0,19 0,01 DJ euro-50 3092 3091,66

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,354 -0,0133y -0,235 1,023 0,437 Euribor-1 -0,37 0,00 Libor-1 USD 0,27 0,275y -0,166 1,121 0,491 Euribor-3 -0,30 0,00 Libor-3 USD 0,38 0,3810y 0,250 1,367 0,731 Euribor-6 -0,20 0,00 Libor-6 USD 0,52 0,52

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,12515 -0,0003 EUR/JPY 114,36 0,30 182,4688 1347 48,73USD/JPY 101,675 0,33 EUR/GBP 0,8427 0,0042 - 1d 1,57 -4,00 1,35GBP/USD 1,3346 -0,0071 EUR/CHF 1,09 -0,0002AUD/USD 0,7697 0,0023 EUR/SEK 9,486 -0,05USD/CAD 1,2869 0,0025 EUR/NOK 9,1937 -0,01