Wednesday, 09 November 2016

P. 1

Rates: Core bonds rally on Trump election

Risk-off is the name of the game overnight after Trump became the unexpected winner of the US presidential election. The shorter end of the US curve fell the most as chances of a Fed rate increase were revised lower. Core bonds may continue to do well, but Trump looks bond unfriendly longer term. Peripherals should underperform.

Currencies: Dollar records substantial losses post-Trump, but sell-off stays orderly

Overnight, the dollar sold off as it became clear that Donald Trump would become the next president of the US. The losses are substantial, but for now no important technical levels are broken in EUR/USD or USD/JPY. The downside of the dollar might still be reasonably well protected as the yen and the euro have also no strong cards to play.

Calendar

• US equities futures lose about 4.5% (S&P) as Trump wins the presidential

election. Asian equities are up to 3% lower with Japan underperforming (-5%) and China outperforming (-0.5%).

• Mr. Asakawa, Japan’s finance minister, said Tokyo is watching the foreign exchange market with “great interest” , but made no comment on the possibility of an intervention from authorities, according to Reuters.

• Ursula von der Leyen, German defence minister, appealed to Mr Trump to avoid isolationism. “It’s in Europe’s interest that the US remains open to the world”. She added that there were many “open questions” about his intentions, including his attitude to Nato and towards Russian president Putin

• Gold surged as much as 4.8% to $1,337.38/ounce before slightly paring those gains. That left gold poised for its biggest gain since after the Brexit vote.

• Brent crude dropped as much as 3.6 per cent to the lowest since August, hitting $44.40 a barrel, while US benchmark West Texas Intermediate fell more than 4 per cent to a low of $43.07.

• China’s PPI rose 1.2% Y/Y in October, marking the second straight month of rising prices after 53 months of annualised contraction ended in September. A median forecast from economists had predicted a 0.9 per cent rise.

• Today, it’s all repositioning on the US election results. Economic data are second tier. Some ECB governors speak and Germany and the US tap the bond 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

Wednesday, 09 November 2016

P. 2

Trumps takes the presidency, markets shocked

Yesterday, global core bonds had an uneventful trading session till the US trading got going. US markets clearly anticipated further on a Clinton victory as most polls suggested. Equities and the dollar moved up, while bonds, yen, Swiss franc and euro slid lower. The probability on a December Fed rate hike increased to 86% from 76% previously. A better than expected NFIB small business optimism and dovish comments by Chicago Fed governor Evans (see yesterday’s Sunset) didn’t impact trading. In a daily perspective, the US yield curve bear flattened with yields up between 4.7/5 bps (2-to-5-yr) and 2.7 bps (30-yr). The German yield curve bear steepened with yields up between 0.3 bp (2-yr) and 4.1 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed up to 4 bps (Portugal) with Greece outperforming (-16 bps) despite Eurogroup comments that any debt relief talks would be delayed at least until 2018.

Markets reaction quite pronounced: Risk off

Overnight, the picture of the markets changed completely, as unexpectedly for most, Donald Trump won the US presidential election. Markets reversed the moves of recent days which counted on a Clinton victory. Besides the victory of Trump, the republicans took the House of representatives and retain their Senate majority. Usually such a constellation gives a clear policy direction for the next years. That is less sure now, given the animosity between Trump and the republican leadership and the unpredictability of the former. Until that is cleared out, which may take weeks, maybe months, uncertainty/volatility will be very high in markets. Most harmful in Trumps’ pre-election programme are his anti-trade, protectionist stance that includes getting out of Nafta and resistance against treaties with Asian-Pacific and EU and his wobble views on international policy with animosity towards China. Economically, he will lower taxes for firms and wealthy individuals, stimulating growth, which together with eventual protectionism is inflationary, given the current late stage of the cycle. His plans, if executed, would push the government deficit and debt higher, also a US Treasury negative. Of course, it will now be important how Trump will act as a president. Which promises he will honour and which he will drop?

Uncertainty first concern

Uncertainty will be the first concern for markets. So, risk-off sentiment will reign. Asian equities are down in various degrees with Japan losing the most -5% on yen strength (see FX section). Other Asian bourses lose 2-3% with China only marginally lower. The US equity S&P futures lose 4.5%. The dollar loses ground across the board

Rates

US yield -1d2 0,774 -0,04395 1,2224 -0,061710 1,8102 -0,008830 2,6832 0,0946

DE yield -1d2 -0,6660 -0,03705 -0,4650 -0,053010 0,1020 -0,058030 0,7072 -0,0533

T-Note future (black) S&P future (orange) (intraday): Clear reaction on Trumps victory, volatility may remain high, but how long?

US yield curve shifts lower but 30-year yield slightly up. Too early to tell whether foreign selling or inflation expectations are at work. with

5-7-yr yields declining the most

Wednesday, 09 November 2016

P. 3

and so do emerging market currencies (especially the Mexican Peso). Regarding bonds, they soar on the risk-off sentiment. The T-Note future rose to 130-31 (now 130-08), up from 129-16. Chances on a Fed rate hike have dropped considerably. In the grey market, the market probability seems to have dropped to about 50%. The US yield curve shifts lower with the biggest moves at the 2-5-sector. At the very long end the gains are minimal. In figures, yields are down about 9 bps at the 2-year, 10.7 bps at the 5-year, 5.7 bps at the 10-year and even up 4 bps at the 30-year. The technical picture of the 5-year yield deteriorated, the picture of 10-year not yet (test 1.75%) while the 30-year yield remains well above 2.5%.

Longer term, Turmp policy may be bond unfriendly

As long the uncertainty continues, bonds should be well underpinned, but volatility will remain high as European investors and later on US investors will continue to adapt positions. However, when uncertainty eases, the Fed may still raise rates in December (however if unrest stays in the market, the Fed will stay put as they usually do in such circumstances). Longer term, a Turmp dominated economic policy looks to bring more growth and more inflation (stimulus via tax cuts at late cycle stance), which could lead to more than expected Fed rate hikes and higher long term yields, especially if the Fed would drag its feet. The drop of the dollar, if sustained) only stimulates the economy more. Higher deficits and debts are another negative. Particular issue for the US Treasuries may be selling from outside the US if confidence in Trump is not restored to a reasonable level. However, these issue will only pop up when calm is restored and Trump is clearer about his programme. For European bonds, they too will enjoy the risk-off with a bull flattening. A weaker dollar means a stronger euro and thus a (unwanted) tightening of financial conditions. This means that it is now unlikely that the issue of tapering will already be on the table at the early December ECB meeting.

Uneventful eco calendar, but US election result key

The US and EMU eco calendars are virtually empty. ECB members Praet, Coeure and Nouy speak as does Fed Kashkari (dove). The US Treasury holds a $23B 10-year Note auction and Germany sells €5B of its 0% 2018 Schatz. The Reserve Bank of New Zealand is expected to cut rates to 1.75% from2%. We keep a close eye on the ECB speakers as the key December meeting comes closer, but following the Trump victory the idea of the announcement of a QE tapering after March during the December ECB meeting has become very unlikely.

So, for today after the Trump victory, it is difficult to give a firm view. Risk off sentiment should reign. However, we have the feeling that core bond gains won’t be too outspoken. It may be too early/risky to use the rally to sell core bonds before some calm returns, but we would certainly not buy bonds into that rally. When ease returns, overvalued bonds should come down.

R2 164,3 -1dR1 163BUND 163 0,8500S1 161,37S2 161,11

No key eco releases today

All eyes on consequences US election

Bund future: up about 100 ticks on Trump victory and risk off sentiment. However, first key resistance at 163 not broken yet

T-Note future: up in volatile trading but technically let’s see whether resistance at 130-01+ and especially 130-15 can be sustainably

broken

Wednesday, 09 November 2016

P. 4

Dollar sold on Trump victory, but sell-off stays orderly

On Tuesday, in a low volume term the dollar remained well bid. The US currency even made some additional gains against the yen going into US dealings, maybe as a Clinton victory was still seen the most likely election outcome. In that scenario is was safer to be dollar long rather than USD short. EUR/USD closed the session at 1.1026 (from 1.1041). USD/JPY finished the day even north of 105, at 105.16 up from 104.46.

Overnight, as the US election results filtered through, it soon became clear that chances on a Trump victory were much bigger than indicated by the polls. A Trump victory contains multiple issues of uncertainty both domestically in the US and worldwide and triggered a broad-based risk-off move. Equities and emerging markets/EM currencies sold off. Currencies like the Korean won, the Mexican Peso, but also the likes of the Aussie dollar all nosedived. AUD/USD nosedived from the 0.7770 area to the 0.76 area. Understandably, the dollar was not able to take up a safe haven role. USD/JPY dropped from the 105 + area to the 101.20, but trades currently again in the 102.40 area. The euro also attracted some USD fugitives with EUR/USD jumping from the mid 1.10 area to the high 1.13 area. The pair trades currently in the 1.1220 area. The Swiss Franc strengthened to the EUR/CHF 1.0755 area, but soon found a bottom. Liquidity issues might be in play, but the SNB is probably also at work to prevent unwarranted strength of the franc.

Later today, the data evidently will be ignored and (currency) markets will try to make up their mind on the consequences of a Trump victory. Uncertainty will remain the name of the game. An ongoing risk of context will continue to weigh on most EM currencies. Even currencies of small countries with solid economic fundamentals (Nok, Sek) might stay under further pressure. With respect to the major dollar cross rates, markets have currently reduced the chances of a Fed rate hike to about 50%. This is a short-term dollar negative. However, the global uncertainty will also affect the reaction function of the BOJ and the ECB. The jury is still out, but in an economic world that is becoming much more protectionist, the bar for BOJ/MOF interventions might be less high. So, short-term the yen might remain well bid, but the BOJ might already come on the radar in case the 99/100 range bottom would come under test.

Currencies

R2 1,1366 -1dR1 1,13EUR/USD 1,12 0,0155S1 1,099S2 1,0826

Yesterday, the dollar market positioned for Clinton victory going into the election outcome

Asian market turned into risk-off modus on Trump victory

EM currencies, small currencies and the dollar are sold

Euro and yen are by default ‘safe havens’

Dollar sold on Trump victory, but losses could have been bigger

.

EUR/USD jumps on Trump victory, but no major technical level is broken yet

USD/JPY: yen attracts safe haven flows, but gains aren’t bigger than after Brexit

Wednesday, 09 November 2016

P. 5

Of late, the BOJ suggested that no further big steps of monetary easing were on cards. This might again change if the prospects for global growth would deteriorate in a profound way. So, the yen remains in pole position to play its role as preferred safe haven currency, but for now we maintain the working hypothesis that it USD/JPY won’t sustainably drop below the 99/100 MT range bottom.

EUR/USD rebounded to just below the 1.13 barrier overnight, but currently trades again in the 1.1225/50 area. To what extent will the euro be able to play a safe haven role in case of global/US uncertainty. Growing risk of protectionism clearly is a big risk for an already fragile EMU economy. Global uncertainty also makes it unlikely that the ECB will announce a QE tapering beyond march 2017 in the near term. It isn’t certazin that this will block further EUR/USD gains short term. Even so, the longer-term picture for the dollar might be less negative. An expansive fiscal policy might be positive for the dollar over time. In this respect, the market might be a bit too quick to assume that a Fed rate hike is out of the way in the near future.

To conclude: a Trump victory is a negative for the dollar short-term but the alternatives (the yen and especially the euro) also don’t play with strong cards. So, we look out whether EUR/USD is able to overcome the 1.1366 range top, the first really important technical hurdle. As is the case for the downside in USD/JPY, we are not convinced that this barrier will be regained that easily.

R2 0,9142 -1dR1 0,905EUR/GBP 0,8978 0,0076S1 0,8857S2 0,8725

Wednesday, 09 November 2016

P. 6

Wed., 9 November Consensus Previous US 13:00 MBA Mortgage Applications -- -1.2% 16:00 Wholesale Inventories MoM (Sep F) 0.2% 0.2% Japan 00:50 BoP Current Account Adjusted (Sep) A ¥1477.0b ¥1975.7b 00:50 Bank Lending Incl/Ex Trusts YoY (Oct) A 2.4%-- 2.2%/2.2% 06:00 Eco Watchers Survey Current / Outlook (Oct) A46.4/49 44.8/48.5 UK 10:30 Visible Trade Balance GBP/Mn (Sep) -£11363 -£12112 10:30 Trade Balance (Sep) -£3950 -£4733 France 08:30 Bank of France Bus. Sentiment (Oct) 99 98 China 02:30 CPI YoY (Oct) A 2.1% 1.9% 02:30 PPI YoY (Oct) A 1.2% 0.1% New Zealand 21:00 RBNZ Official Cash Rate 1.75% 2.00% Events 09:00 ECB’s Praet Speaks in Brussels 09:30 Riksbank Minutes from Monetary Policy Meeting 11:00 European Commission Economic Forecasts 11:35 Germany to sell €5B 0% 2018 Schatz 15:00 ECB’s Nouy Speaks in Brussels 17:45 ECB’s Coeure Speaks at Panel Discussion in Lyon, France 19:00 US $23B 10-yr Note auction 19:30 Fed’s Kashkari Speaks in Eau Claire, Wisconsin

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 1,81 -0,01 US 0,77 -0,04 DOW 18332 18332,43DE 0,10 -0,06 DE -0,67 -0,04 NASDAQ for Exch - NQI #VALUE!BE 0,37 -0,06 BE -0,66 -0,03 NIKKEI 16252 16251,54UK 1,25 0,05 UK 0,21 0,03 DAX 10482,32 10482,32JP -0,08 -0,01 JP -0,25 0,00 DJ euro-50 3023 3023,43

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,344 03y -0,126 1,090 0,694 Euribor-1 -0,37 0,00 Libor-1 USD 0,26 0,265y -0,008 1,259 0,843 Euribor-3 -0,31 0,00 Libor-3 USD 0,40 0,4010y 0,468 1,655 1,206 Euribor-6 -0,21 0,00 Libor-6 USD 0,56 0,56

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,12 0,0155 EUR/JPY 114,57 -0,69 183,5516 1318,26 45,24USD/JPY 102,35 -2,05 EUR/GBP 0,8978 0,0076 - 1d 1,05 34,05 -1,04GBP/USD 1,2473 0,0073 EUR/CHF 1,0814 0,0051AUD/USD 0,7645 -0,0052 EUR/SEK 10,0105 0,05USD/CAD 1,3407 0,0030 EUR/NOK 9,1629 0,07

Calendar

Wednesday, 09 November 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 Mathias van der Jeugt +32 2 417 51 94 Institutional Desk +32 2 417 46 25 Dublin Research France +32 2 417 32 65 Austin Hughes +353 1 664 6889 London +44 207 256 4848 Shawn Britton +353 1 664 6892 Singapore +65 533 34 10 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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