Wednesday, 23 March 2016

P. 1

Rates: Sentiment-driven trading with more underperformance US?

US Treasuries seem sensible to more hawkish comments of late, while Bunds hover in the middle of a sideways range. We expect few changes in the run-up to Easter market holidays as the calendar is unattractive and flows could thin.

Currencies: Terror attacks weigh on euro. Dollar rebounds

Yesterday, the risk-off sentiment due to the terror attacks in Brussels was a slightly negative for the euro. Later in the session, the dollar profited also from higher US yields. Growing Brexit fears keep sterling under pressure. Today, there are few eco data. The dollar looks still well bid.

Calendar

• US Equities reversed most of their losses yesterday to end the session mixed.

The Dow ended a 7-day winning streak. This morning, most Asian shares trade slightly lower. Chinese stocks reversed their losses.

• Fed’s Evans said yesterday the Fed is on track for “gentle, gradual” rate hikes unless economic data come out a lot stronger or inflation picks up faster, adding that he expects two more rate hikes this year. Fed’s Harker said they should consider another rate hike as early as next month.

• Republican frontrunner Donald Trump swept to victory in Arizona, but his rival Ted Cruz took a big lead in Utah. On the Democratic side, Hillary Clinton won in Arizona, but Sanders won in Utah.

• Confidence at Japanese manufacturers eased in March and is unlikely to change much in the next few months, the Reuters Tankan showed this morning. Services-sector sentiment, on the contrary, rebounded but is expected to weaken again in June, confirming that private consumption remains fragile.

• The American Petroleum Institute said in a report overnight that that US crude stockpiles rose 8.8 million barrels last week to reach a record high of 531.8 million. The Brent oil price trades slightly lower this morning, at $41.37/barrel currently.

• Today, the eco calendar contains the US new home sales. In the euro zone, the eco calendar is empty. ECB’s Weidmann, Fed’s Bullard and BoE’s Bailey 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, 23 March 2016

P. 2

Safe haven bid after Brussels bombings

Global core bonds initially profited from safe haven flows after a savage terrorist attack on Belgian’s national airport and a subway station. They largely lost gains afterwards as the main European sentiment indicators were better than expected (PMI, IFO) suggesting that the European economy stopped cooling off. Markets ignored a really strong Richmond Fed survey. Later in US trading, US Treasury slid lower without a very strong trigger. There might have been some impact of Chicago Fed governor Evans, as the belly was hit more than the longer end. However, the belly already underperformed earlier in the US session. So it might have been technically inspired too. In a daily perspective, the German yield curve bull flattened with yields 0.2 bps (2-yr) to 3.5 bps (30-yr) lower. The US yield curve went moderately higher with yields up between 0.6 bps (30-yr) and 3.7 bps (5-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany widened up to 2 bps with Greece underperforming (+10 bps).

Chicago Fed Evans was optimistic on US fundamentals. The pause in raising rates “is about assessing risks and just be careful”. A “wait and see stance” is appropriate. He added that the Fed needs confidence that core PCE inflation will get to 2%. Evans called the projected rate path a pretty good setting, even as the number of rate hikes is conditional on the eco outlook. He doubts whether the improvement in core inflation is sustainable and sees more downside than upside risks. Evans remains dovish, but is no longer the most dovish governor as he clearly validated the median view (2 rate hikes). Given his previous position, we might think that Evans is now part of the majority centrist part of the FOMC members, which became more dovish recently.

Philly Fed Harker (non-voter) was hawkish overnight. He said that every meeting is a “live” meeting and he would be supportive of another 25 bps hike (in April) if the economy continues to be resilient. With oil seemingly bottoming out, he felt reasonably confident that inflation would move to the 2% target. Harker said he was not a two (rate) person, putting him in the hawkish camp with likely three rate projection for 2016, as he said that after three rate hikes policy would still be “incredible accommodative”. Also in other remarks he said he believes that the FOMC needs to go faster to the neutral rate than most of his fellow FOMC members think.

Rates

US yield -1d2 0,8806 0,00845 1,4045 0,026710 1,9351 0,021330 2,7169 0,0024

DE yield -1d2 -0,4720 0,00105 -0,2910 -0,001010 0,2140 -0,012030 0,9272 -0,0099

Bund future (black) & S&P future (orange) (intraday): Early safe haven bid fades away on stronger EMU data. US equities go higher.

US and EMU 1yr/1yr forward: recent US downward trend put into question

US-Ge

Initial safe haven bid countered by strong EMU sentiment data

German curve bull flattens

US Treasuries underperform

Fed Evans remains dovish, but now in centrist camp

Fed Harker hawkish; expects at least three rate hikes in 2016

Wednesday, 23 March 2016

P. 3

Today, US new home sales are forecast to have rebounded by 3.2% M/M in February to 510 000, following a 9.2% M/M decline in January. Although inventories are tight, we expect overall sentiment should support sales and therefore we expect a stronger rebound.

Germany taps very long end

The German Finanzagentur holds a 30-yr Bund auction (€1B 2.5% Aug2046). The Bund didn’t cheapen in ASW-spread terms in the run-up to the auction, but trades normal at the very long end of the German yield curve. Total bids at the previous 4 30-yr Bund auctions averaged €1.34B and we don’t expect much improvement today with the 30-yr yield back below 1%. The US Treasury starts its end-of-month refinancing operation with a $13B 2-yr FRN auction. The refinancing operation continues next week with 2-yr, 5-yr and 7-yr Note auctions.

Sentiment-driven trading; more underperformance US?

R2 164 -1dR1 163,4BUND 162,34 -0,0800S1 160,81S2 160,11

Overnight, most Asian equity indices trade around 0.5% lower in an uneventful Asian trading session. The US Note future trades stable around the lows reached yesterday (see above). Oil prices continue flirting with this year’s high in the $41-42/barrel area. We expect a neutral to slightly weaker opening for the Bund.

Today’s eco calendar is very thin with only second tier new homes sales and a public appearance by St. Louis Fed Bullard. The Fed governor already sounded hawkish though last Friday. With Friday’s market holiday approaching, volumes could become thin in these conditions and intraday moves driven by oil prices or equity market sentiment. Technically, the Bund remains in the middle of the 160.81/164 range. For the US Note future, it seems that first resistance (129-26), previous neckline double top) will be able to hold. Stronger eco data and hawkish Fed talk might bring the contract back towards the lower bound of the trading range at 128-01+.

Going forward, we think that there is a firm bottom below rate markets in yield terms as the ECB doesn’t intend to lower rates further. As of last Wednesday, the Fed also put a (temporary) ceiling on rate markets. Therefore, we put our downward bias for core bonds on hold and favour more sideways trading ahead.

German Bund: sideways trading between 160.81 and 164

US Note future: 129-26 resistance holds after FOMC. Return action to recent low on the back of hawkish Fed talk

US-G

Stronger rebound New Home sales?

Wednesday, 23 March 2016

P. 4

Dollar better bid

On Tuesday, terrorist attacks in Brussels created a risk-off sentiment on European markets, but market tensions gradually eased. The euro declined against the dollar. The EMU sentiment indicators were good but had no impact on euro trading. EUR/USD closed the session at 1.1217 (from 1.1241 on Monday, but off the intraday low of 1.1189). The yen initially outperformed but a USD/JPY short squeeze in the US reversed the earlier losses. USD/JPY even closed the day in positive territory at 112.37 (from 111.95). The move was supported by a rise in US short-term yields.

This morning, Asian equities show small losses. The PBOC fixed the yuan slightly stronger against the dollar. The off-shore yuan initially rose on market talk on a tax to curb currency speculation, but the gains couldn’t be sustained. The rebound in commodities, including oil, runs into resistance. Commodity currencies like the Aussie dollar (AUD/USD 0.7615) and the Canadian dollar (USD/CAD 1.308) are slightly losing ground. The safe haven bid for gold peters out. The slowdown in commodities is slightly positive for the dollar. EUR/USD trades in the 1.1205 area. USD/JPY holds in the 112.40 area, near the recent highs, even as equities struggle.

The eco calendar is thin today with only the US new home sales. ECB’s Weidmann and Fed’s Bullard are scheduled to speak. US new home sales are forecast to have rebounded by 3.2% M/M in February to 510 000, following a 9.2% M/M decline in January. We expect overall sentiment to support sales and expect a stronger rebound. In the global and the financial press, there will be plenty of analysis on the political and economic impact of yesterday’s terror attacks. However, the direct impact on markets will probably fade. So, there is still no dominant factor to guide USD trading. That said, short-term dollar sentiment improves as the US currency rebounds from the post-Fed lows. US interest rates/interest rate differentials are slightly USD-supportive, too. The rebound of USD/JPY confirms this picture of improving USD sentiment. We don’t draw any long-term conclusions yet, but in a daily perspective, the dollar looks to be in pole-position this morning.

Currencies

R2 1,1495 -1dR1 1,1376EUR/USD 1,1202 -0,0057S1 1,1058S2 1,081

EUR/USD: dollar extends cautious rebound

-

USD/JPY: USD rebounds off the recent lows

Tion

Euro lost slightly ground on terror attacks

USD outperformed

Asian equities trade marginally lower

Dollar stays well bid as commodity rally slows

Eco calendar is almost empty

USD maintains positive ST momentum

Wednesday, 23 March 2016

P. 5

Before the FOMC decision, we advocated sideways EUR/USD trading in the 1.1200/1.0810 range. This range top was broken after last Wednesday’s soft FOMC outcome. It will take some time for the dollar to digest the U-turn in the Fed’s interest rate assessment. Still, we don’t expect a big sustained jump higher in EUR/USD. 1.1376 is a first resistance. 1.1495 is the key line in the sand medium term. The soft Fed approach pushed USD/JPY temporary below the 110.99/114.87 sideways range, but the move was countered by warnings from the BOJ. These warnings will probably continue in case of a drop below 111. Yesterday’s rebound is promising and leaves the downside of USD/JPY better protected, unless risk sentiment turns outright negative again. The jury is still out, but the correction low of 110.67 looks more solid now.

Sterling under pressure as terror fuels Brexit fears

Yesterday, sterling selling intensified. The terrorist attacks in Brussels hit the UK currency hard. The events reinforce the position of the Brexit camp. Rating agency Moody’s also mentioned the risk of negative economic fall-out from a Brexit scenario. Mid-morning, UK inflation was marginally softer than expected. The monthly budget data were also worse than forecast. The impact of the data was modest, but added to the overall sterling negative sentiment. EUR/GBP extended its trip north and tested the 0.79 big figure. EUR/GBP closed the session at 0.7895 (from 0.7823). Cable lost about two big figures intraday and closed the session at 1.4208 (from 1.4369).

Today, there are no eco data in the UK. BoE deputy governor Bailey speaks, but he will most probably only address issues of financial regulation. Yesterday, the terrorist attacks highlighted the multiple political event risk in the run-up to the Brexit vote on June 23. Nervousness on the issue probably won’t disappear anytime soon. Sterling will probably stay in the defensive.

Last week, sterling selling eased slightly, as Brexit-fears moved (temporary) to the background. For cable, the hypothesis of a bottoming out process remains in place. For EUR/GBP the picture was damaged by the post-ECB euro rebound. A first test of the 0.7929 resistance was rejected, but the level remains within reach. A break above this level would damage the picture of sterling further and open the way to the 0.8000/0.8066 area.

R2 0,8066 -1dR1 0,7929EUR/GBP 0,789 0,0070S1 0,7652S2 0,7526

EUR/GBP: nearing the 0.7929 resistance

GBP/USD: sterling declines, dollar rebounds

Wednesday, 23 March 2016

P. 6

Wednesday, 23 March Consensus Previous US 12:00 MBA Mortgage Applications (Mar 18) -- -3.3% 15:00 New Home Sales Total/MoM (Feb) 510k / 3.2% 494k / -9.2% Italy 10:00 Hourly Wages MoM YoY (Feb) -- 0.0% / 0.7% Belgium 15:00 Business Confidence (Mar) -6.0 -6.6 Sweden 09:00 Consumer Confidence (Mar) 98.2 98.0 09:00 Manufacturing Confidence s.a. (Mar) 114.0 115.7 09:00 Economic Tendency Survey (Mar) 108.2 108.4 Events 00:00 Fed's Harker Speaks in New York 13:40 ECB's Weidmann Speaks in Liechtenstein 14:00 Fed’s Bullard Speaks on Bloomberg 17:15 BoE’s Bailey Speaks in London Germany Bund Auction (€1B 2.5% Aug2046) (11:30) US 2Yr FRN Auction ($13B) (16:30)

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 1,94 0,02 US 0,88 0,01 DOW 17583 17582,57DE 0,21 -0,01 DE -0,47 0,00 NASDAQ for Exch - NQI #VALUE!BE 0,48 0,00 BE -0,42 -0,01 NIKKEI 17001 17000,98UK 1,45 -0,02 UK 0,48 0,00 DAX 9990 9990,00JP -0,10 -0,01 JP -0,24 -0,01 DJ euro-50 3051 3051,23

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,344 0,0013y -0,111 1,108 0,892 Euribor-1 -0,33 0,00 Libor-1 USD 0,51 0,515y 0,050 1,339 1,039 Euribor-3 -0,24 0,00 Libor-3 USD 0,59 0,5910y 0,589 1,760 1,445 Euribor-6 -0,13 0,00 Libor-6 USD 0,75 0,75

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,1202 -0,0057 EUR/JPY 125,8 -0,35 177,1159 1235,26 41,41USD/JPY 112,35 0,27 EUR/GBP 0,789 0,0070 - 1d 0,75 -11,70 -0,29GBP/USD 1,4192 -0,0199 EUR/CHF 1,0917 0,0007AUD/USD 0,7626 0,0012 EUR/SEK 9,2232 -0,03USD/CAD 1,3068 0,0013 EUR/NOK 9,4187 -0,03

Calendar

Wednesday, 23 March 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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