Tuesday, 27 September 2016

P. 1

Rates: Bund tests key resistance, but break didn’t occur

Risk sentiment on stock markets will probably be today’s main driver for core bond markets. Do bourses get some relief after the outcome of the first US presidential debate? Or will European banking woes again take the upper hand? Technically, the Bund tested important resistance yesterday (165.63), but a break higher didn’t occur.

Currencies: dollar rebounds slightly after presidential election debate

Yesterday, the dollar was under pressure against the euro and even more against the yen due to global uncertainty ahead of the presidential election debate. Overnight sentiment on risk improved. The dollar and risk currencies rebounded as Clinton performed well in the debate. EUR/GBP tested the post-Brexit top, but no break occurred yet.

Calendar

• US and European equities fell sharply, as risk off sentiment dominated trading.

Financials were hit the most. Sentiment improved overnight with most Asian bourses showing modest gains, maybe helped by the US presidential debate.

• According to a CNN/ORC poll 62% of viewers believed Clinton won the first presidential debate. Most conversations on social media were about Trump. The Mexican Peso, a yardstick for Clinton jumped sharply higher.

• Greek lawmakers vote today on a bill containing measures Greece should take to get its next bailout tranche. Meanwhile Italian PM Renzi decided the referendum on constitutional reform will take place on December 4.

• ECB Coeuré said in Suddeutsche Zeitung that helicopter money blurs the line between fiscal and monetary policy, while he was also not in favour of buying bank bonds. He said the ECB will continue to buy assets until inflation adjusts towards the target. Focus is now on implementation.

• Profits of China’s industrial corporations jumped the most in three years, adding to evidence of continued stabilization in manufacturing and boosting prospects for their ability to repay debt.

• ECB Draghi and Coeuré once more called on national governments and Brussels to redouble their efforts to create a banking union, pool more fiscal powers in the EU and take structural measures to lift growth, as monetary policy cannot do the trick by itself. Draghi also warned the UK negotiations should provide no exceptions to the rules of the internal market.

• Today, the eco calendar contains EMU M3. In the US, the services PMI, Richmond Fed manufacturing and Consumer confidence surveys are published. The US, Italy and the Netherlands tap the market.

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, 27 September 2016

P. 2

Moderate bond gains as risk off sentiment mounts

Yesterday, global core bonds started the week on a strong footing and eked out moderate gains amid negative risk sentiment (DB, Turkey & shadow of US presidential debate) and despite a stronger IFO business survey. Technically, the Bund tested the contract high at 165.67 with a new high at 165.75. However, firmer evidence is needed before concluding the break succeeded. We would also like to see a similar break of the 10-yr German yield below -0.20% before drawing firm conclusions. Equities were hard hit in Europe with problems at DB at the centre of attention. US New Home sales fell 7.6% in August, but were nevertheless a bit stronger than expected. The US 2-yr Note auction was mixed. In a daily perspective, the German curve bull flattens with yields down between 1.1 bps (2-yr) and 3.5 bps (30-yr). US yields fell between 1.6bps (2-yr) and 3.4 bps (5-yr), the belly outperforming the wings.

In the intra-EMU bond market, calm reigned with underperformance of Greece and Portugal (+4 bps 10-yr yield spread). Spanish bonds didn’t react to the regional election results, while the Italian PM Renzi said that the referendum on Constitutional reform will take place on Dec. 4. It is important and if the reforms are rejected, Renzi will lose his credibility and the ability to reform the countries’ arcane economy. This would hit the BTP market, as the 130% debt load could become insurmountable.

Plenty US eco data releases

Euro area M3 money supply is expected to have increased to 4.9% Y/Y in August from 4.8% Y/Y in July. However, markets will look more to the lending data. Credit growth to the private sector has improved very slowly and gradually, but is still too low to be good. Especially after the first TLTROs has been held in June, it will be interesting to see whether lending accelerates. Markets usually don’t react to the release. In the US, the services PMI is expected to have increased marginally to 51.2 in September from 51 previously. The index moves sideways since January and we have little signals of change. Anyway, it is no strong mover. September consumer confidence (Conference Board) is expected to have dropped to 98.8 from 101.1 in August, its highest level since October 2015. The Michigan consumer sentiment index fell marginally in September but peaked already in May. With presidential elections looming we side with the consensus and expect a decline in confidence. The Richmond Fed manufacturing index is expected to have rebounded to -2 in September from -11 in August. The index is very volatile and after the 22 points drop in August, the rebound may even be a bit stronger than expected.

Rates

US yield -1d2 0,7657 0,00765 1,138 -0,019710 1,6012 -0,017230 2,3331 -0,0147

DE yield -1d2 -0,6850 -0,00905 -0,5640 -0,005010 -0,1180 -0,034030 0,4582 -0,0291

T-Note future (black) and S&P future (orange) intraday: Risk off day pushes Treasuries up and equities down

USD/MXN: Mexican Peso gains sharply during presidential debate, showing markets believe Clinton has won this match. Also the

CNN/ORC poll said Clinton won by 62%.

Moderate gains on risk-off sentiment

German curve bull flattens, while in the US the belly outperforms

No reaction on Spanish regional election outcome, nor on the Italian decision to hold referendum Dec 4.

Will M3 report show acceleration of lending (after TLTROs are introduced?

US consumer confidence to weaken, but Richmond Fed manufacturing index to rebound

Tuesday, 27 September 2016

P. 3

The Netherlands and US tap market

The Dutch debt agency taps the off the run 30-yr DSL (4% Jan2037) for €0.75-1.25B. The bond didn’t cheapen in ASW spread terms going into the auction and is rather rich on the Dutch yield curve. Therefore we don’t expect spectacular demand. The US Treasury started its end-of-month refinancing operation with a mixed $26B 2-yr Note auction. The auction stopped through the 1:00 PM bid side, but the bid cover was rather light (2.65). Bidding details showed a pretty good direct bid, while the indirect bid which represent foreign investor demand was quite weak. Today, the US treasury continues its refinancing operation with a $34B 5-yr Note auction. Currently, the WI trades around 1.15%.

How fragile are stock markets?

Overnight, Asian equities show signs of relief after the first US presidential debate. Rallying stock prices and a stronger Mexican peso show that markets picked Clinton as winner of the first debate. Chinese industrial production profits also rose to the highest level in 3 years. The US Note future lost ground and Brent crude is again somewhat higher. We expect a lower opening for the Bund.

Today’s eco calendar contains EMU M3 money supply data, the Richmond Fed manufacturing Index and US consumer confidence. We see upside risks to consensus for the Richmond Fed and side with consensus for the M3 and consumer confidence. We don’t expect the data to be relevant though. Comments by Fed vice-chair Fischer, who is more hawkish than Yellen, are a wildcard for trading. Global core bond trading will mainly be influenced by risk sentiment on stock markets. Will bourses be able to hold on to opening gains?

Overall, we favour more range trading for the Bund within the post-Brexit range between 163-165.63 (upper bound tested yesterday). The trading range for the US Note future is expected to be 130-01+ to 132-05, at least until the first week of October (ISM’s/payrolls) or until Washington-based Fed governors change the tone of their public comments (Oct 14, Yellen speech).

R2 166 -1dR1 165,75BUND 165,69 -0,6600S1 164,29S2 163

German Bund: Range first test of upper bound sideways trading range (163 - 165.63) failed

US Note future: Downside better protected short term after dovish FOMC

Tuesday, 27 September 2016

P. 4

Dollar rebounds after presidential debate

On Monday, the dollar traded in the defensive as global sentiment turned risk off and as core bond yields declined. Investors were cautious on US assets going into the first US presidential election debate. Even so, the losses of the dollar remained modest, especially against the euro. EUR/USD closed the session at 1.1254 (from 1.1226 on Friday). The loss in USD/JPY was a bit more outspoken. The pair finished the session at 100.33 (from 101.02 on Friday).

Overnight, Asian indices opened in the red copying the decline in the US yesterday evening. Chinese industrial profits jumped in August, but initially this was not enough to change fortunes for Asian equities. Later, investors concluded that Clinton won the presidential debate and global equities rebounded. It supported too currencies like the Mexican peso. Globally, high yield/risk currencies profited. Among the majors, the dollar outperforms as equities rebound and as core bonds are under minor pressure. USD/JPY rebounded from the 100.10/20 area to the 100.85/90 area. The move of the dollar against the euro was again very modest and EUR/USD trades near 1.1245.

Today, Euro area M3 money supply will be published. Markets especially look to the lending data. The report is interesting but has usually only limited impact on currencies. In the US, September consumer confidence (Conference Board) is expected to have dropped to 98.8 from 101.1 in August, its highest level since October 2015. The Michigan consumer sentiment fell marginally in September. With presidential elections looming we side with the consensus and expect a decline in confidence. The Richmond Fed manufacturing index is expected to have rebounded to -2 in September from -11 in August. After the 22 points drop in August, the rebound may be a bit stronger than expected. The combined data probably won’t change the broader picture for USD trading. Consumer confidence has most potential to move the dollar. A weaker figure might be slightly USD negative. Risk-on sentiment in the wake of the Presidential debate will be driver for trading this morning. However, we don’t expect the move to go far. The uncertainty on the outcome of the presidential election isn’t over yet. So, we expect any intra-day USD rebound to be modest and short-lived. Especially, in USD/JPY up-ticks might attract renewed selling.

Currencies

R2 1,1366 -1dR1 1,1327EUR/USD 1,1247 0,0015S1 1,1123S2 1,1046

Yesterday, the dollar traded in the defensive due to risk-off

EUR/USD still little affected by global market swings

USD/JPY: off the recent lows after US presidential debate

Risk currencies and the dollar rebound as Clinton is the winner of the US presidential debate.

EMU money supply and US consumer confidence to take center stage today

How long will the ‘Clinton driven’ risk-on rebound continue?

Tuesday, 27 September 2016

P. 5

EUR/USD tested the 1.1123 support before the Fed, but the test was rejected as the Fed stayed in wait-and-see modus. The Fed decision hasn’t changed the broader picture for EUR/USD. Markets will look out whether the data support the case for a December rate hike. Swings in December rate hike expectations will probably be the driver for USD trading. The dollar might lose slightly further ground short-term, but as long as the market implied probability of a Fed rate hike remains at current levels, the downside of the dollar looks well protected. We prefer more range trading in the 1.1123/1.1366 range and a sell-on-upticks approach. USD/JPY remains in the defensive after the BOJ meeting. The post-BOJ decline of the yen was reversed very soon. We stay cautious on USD/JPY long exposure. However, the 99.54/99.02 area will remain a strong support. 104.32 is the first main resistance. We expect the established 99.89/104.32 range to hold, but downside risks have grown post BOJ/FED.

Sterling nears important support levels

On Monday, sterling remained under pressure. Markets still pondered the chances of a hard Brexit as UK politicians recently kept the door open for a scenario of the UK losing some of its access to the EU market in order to regain boarder control. A survey among business leaders also showed that a majority is considering to move their headquarters outside the UK. EUR/GBP jumped temporary north of 0.87, but a real test of the 0.8725 post Brexit top didn’t occur, yet. Negative sentiment on risk is a slight additional negative for sterling. The rejected test even triggered some profit taking on EUR/GBP longs. The pair closed the session at 0.8673 (from 0.8659). The downside pressure on cable was more modest as overall dollar weakness slowed the decline of cable. The pair almost touched Friday’s low in the 1.2915 area, but a break didn’t occur.

Today, the CBI reported sales will be published. A modest setback from 9 to 5 is expected. We don’t have much arguments to take a different view from the consensus. A downward surprise might be (slightly) negative for sterling. However, in a day-to-day perspective, a more constructive risk sentiment might temporary ease the recent sterling decline. Both EUR/GBP and cable are also nearing important technical barriers at respectively 0.8725 and 1.2866/1.2798. These levels might provide some temporary support for sterling short-term. That said, the overall picture of sterling remains very fragile. The fear for a hard Brexit might still resurface/stay in place. In this context, we don’t expect any GBP rebound to go far. A sell sterling on upticks approach remains preferred.

R2 0,8815 -1dR1 0,8725EUR/GBP 0,8663 0,0014S1 0,8344S2 0,8251

EUR/GBP: first test of 0.8725 post-Brexit top rejected

GBP/USD: struggles not to fall further below 1.30

Tuesday, 27 September 2016

P. 6

Tuesday, 27 September

Consensus Previous

US 15:00 S&P CoreLogic CS 20-City MoM SA / YoY NSA (Jul) 0.0%/5.10% -0.1%/5.1% 15:45 Markit US Services PMI (Sep P) 51.2 51.0 15:45 Markit US Composite PMI (Sep P) -- 51.5 16:00 Consumer Confidence Index (Sep) 99.0 101.1 16:00 Richmond Fed Manufact. Index (Sep) -2 -11 Japan 01:50 PPI Services YoY (Aug) A 0.2% 0.4% China 03:00 Swift Global Payments CNY (Aug) A 1.86% 1.90% 03:30 Industrial Profits YoY (Aug) A 19.5% 11.0% UK 12:00 CBI Distributive Trades Survey Reported Sales (Sep) 5 9 EMU 10:00 M3 Money Supply YoY (Aug) 4.9% 4.8% Germany 08:00 Import Price Index MoM / YoY (Aug) -0.1%/-2.5% 0.1%/-3.8% Events 27-28/09 International Energy Forum in Algiers 10:00 Riksbank’s Ingves, Jansson Speeches 11:00 Dutch DSL auction (€1.25B 4% 2037) 11:00 Italian CTZ (€2.5B 0% 2018) and I/L (€1B 1.25% 2032) auction 17:15 Fed Vice Chair Fischer Discusses Why Study Economics? 19:00 US $34B 5-yr Note auction

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 1,60 -0,02 US 0,77 0,01 DOW 18095 18094,83DE -0,12 -0,03 DE -0,69 -0,01 NASDAQ for Exch - NQI #VALUE!BE 0,12 -0,03 BE -0,62 -0,01 NIKKEI 16663 16663,47UK 0,71 -0,02 UK 0,08 0,00 DAX 10393,71 10393,71JP -0,07 -0,02 JP -0,26 -0,04 DJ euro-50 2976 2975,88

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,345 03y -0,225 1,045 0,414 Euribor-1 -0,37 0,00 Libor-1 USD 0,27 0,275y -0,165 1,155 0,472 Euribor-3 -0,30 0,00 Libor-3 USD 0,38 0,3810y 0,260 1,427 0,731 Euribor-6 -0,20 0,00 Libor-6 USD 0,53 0,53

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,1247 0,0015 EUR/JPY 113,37 0,13 183,0965 1334,21 47,17USD/JPY 100,82 -0,04 EUR/GBP 0,8663 0,0014 - 1d -3,23 -0,25 0,81GBP/USD 1,2978 0,0003 EUR/CHF 1,0906 0,0013AUD/USD 0,7664 0,0041 EUR/SEK 9,5907 0,01USD/CAD 1,3172 0,0011 EUR/NOK 9,0991 -0,01

Calendar

Tuesday, 27 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.

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