Wednesday, 17 May 2017

P. 1

Rates: Trump affaire deteriorates risk sentiment

Risk sentiment deteriorated overnight as the Russia-related Trump affaire took on bigger proportions. Safe havens like US Treasuries, gold and JPY gained ground. The absence of eco data suggests that risk sentiment will be today’s key driver for trading. A break from the US Note future above 125-26+ would suggest return action to the contract high short term.

Currencies: US political risk hammers US dollar

Yesterday, EUR/USD was propelled both by euro strength and USD softness on recent poor US eco data. A flaring up of political issues in the US is putting additional pressure on the dollar. Especially USD/JPY is vulnerable if risk sentiment deteriorates. The UK labour data are in focus for sterling trading. The UK currency recently lost its positive spin.

Calendar

• Wall Street ended unchanged (Dow, S&P) with Nasdaq outperforming

(+0.33%), marching to a new record high. Overnight, risk sentiment deteriorated as the latest Trump-scandal escalates.

• President Trump asked then-FBI Director Comey to back off the investigation of former National Security Adviser Flynn shortly after Mr. Flynn had resigned, according to two people close to Mr. Comey.

• Austrian centre-left Chancellor Kern said leaders of the parties in Parliament had agreed on snap elections Oct. 15, a year earlier than scheduled and giving the anti-immigrant Freedom Party a strong chance to enter the government.

• The ECB is not concerned by a recent rise in EMU bond yields as they reflect improved growth prospects, receding fears of deflation, improved inflation expectations and increased risks from outside the bloc, governor Coeure said.

• The US economy is forecast to expand at a 4.1% annualized pace in Q2 according to the latest update of the Atlanta Fed's GDP Now forecast model. Our in-house model currently expects 3.1% Q/Qa growth.

• Australia had its AAA credit rating affirmed by S&P after the government’s latest budget projected a return to surplus by 2021.S&P kept a negative outlook, issued in the wake of a knife-edge federal election last July.

• Today’s eco calendar is thin with UK labour market data and final EMU CPI figures. Germany sells its 30-yr Bund and Greek parliament is expected to vote on additional reform measures.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Wednesday, 17 May 2017

P. 2

Core bonds barely changed in thin trading

Global core bonds ended mixed in another session without firm direction. Core bonds traded in consolidation mode awaiting new impetus. Other markets didn’t impact core bonds in a decisive way. Oil tried to go up for a fifth session, but industry inventory data showed higher inventories sending oil pricesl lower into the close. European and US equities ended again little changed . FX markets showed more dynamics with euro strength (EUR/USD tested 1.11 handle) and dollar weakness (USD/JPY slid towards the 113 big figure). US yields ultimately fell between 0.6 and 1.5 bps, while German yields were virtually unchanged. On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed 2,6 and 10 bps for Spain, Italy and Portugal.

Risk off overnight after new “Trump” revelations

After US closure, US President’s Trump latest Russia-related scandal spiralled out of control. Trump asked former FBI chief Comey to let an FBI investigation into former national security adviser Flynn go, according to a memo. It suggests more evidence of interfering or obstructing with the investigation about Russian influence on the US election and alleged links between team Trump and Moscow. The leakage of the memo comes only one day after the Washington Post revealed that president Trump shared confidential information on Isis with the Russian foreign minister. Some politicians at Capitol Hill already compare this scandal with Nixon’s Watergate. The latest twist also gets a grip on markets with risk sentiment deteriorating during Asian trading (higher US Treasuries, lower stocks, stronger yen, gains for gold).

Empty calendar, traders to eye ECB speakers tomorrow

In EMU, only the final HICP inflation report will be released. We expect no changes, but the details may be interesting, albeit not so much for markets. The Greek parliament votes on additional reform measures, which are needed to convince official creditors to release the next tranche of the bailout loan.

ECB Nowotny spoke in Vienna. The only headline was that the ECB policy had less additional impact the longer it remains in place. ECB Coeuré said that the ECB’s communication need to be clear and time-consistent. These comments didn’t bring us much news, but tomorrow, various key ECB members speak including Draghi. With the June 8 in mind and given all kinds of opinions floated in past weeks, it might be time to prepare markets for the kind of decisions that may or may not be expected.

Rates

US yield -1d2 1,27 -0,025 1,82 -0,0310 2,29 -0,0430 2,97 -0,03

DE yield -1d2 -0,66 0,015 -0,32 0,0010 0,42 0,0030 1,24 0,00

German curve nearly unchanged

US yields slightly lower

Peripheral spreads narrow

Bund future (orange) and T-Note future (black) (intraday, this week): Uneventful tight range trading, but US Note future gains ground

overnight on Trump affaire

10-yr inflation expectations have stabilized at lower level (EMU) or are rolling over (US), as US inflation data disappoointed two months,

oil prices are going nowhere and little signs of wage growth

Nothing on calendar to move main markets

Wednesday, 17 May 2017

P. 3

Another difficult 30-yr Bund auction?

The German Finanzagentur taps the on the run 30-yr Bund (€1B 2.5% Aug2046). Total bids at the previous 4 30-yr Bund auctions averaged only €1.4B and we don’t expect much improvement today even if the Bund cheapened in ASW spread terms going into the auction and trades rather cheap at the very long end of the German yield curve.

Trump affaire gets grip on trading

Overnight, risk sentiment deteriorated (see above) as the Russia-related Trump affaire took on bigger proportions. Traditional safe havens like gold, the US Note future and the Japanese yen gain ground, suggesting a stronger opening for the Bund as well.

Today’s eco calendar contains only final EMU CPI which won’t impact trading. Risk sentiment will be key for trading with markets watching the latest developments in the Trump affaire. Risk aversion could support core bonds short term, in absence of other trading factors.

The Bund and especially US Note future’s recent rebound higher made the technical picture more neutral again. A move above 125-26+ in the US Note future would suggest that we might revisit the contract high even if we’re on the brink of another Fed rate hike (June 14). Such rally could be interesting to set up new short positions.

Medium term, policy normalization by the Fed and ECB could push the German 10-yr yield back to 0.5% and the US 10-yr yield to 2.6% ahead of potentially key June policy meetings. The German 5-yr yield (-0.27%) and 30-yr yield (1.25%) already bumped into technical resistance.

R2 163,99 -1dR1 162,49BUND 160,68 0,08S1 158,73S2 158,28

German Bund: Waiting new impetus ahead of ECB meeting. Several key speeches scheduled for tomorrow

US Note future: Trump affaire gets grip on trading, lifting US Treasuries short term

Wednesday, 17 May 2017

P. 4

EUR/USD: euro breaks topside of the ST range as US political

uncertainty weighs on the dollar

USD/JPY: a trump-inspired reversal?

US political uncertainty hammers US dollar

On Tuesday, EUR/USD cleared the 1.1023 resistance. The move was due to USD weakness on recent Trump-related issues and on disappointing US data. At the same time, sentiment on the euro remained constructive. EUR/USD closed the session at the 1.1083. The loss of USD/JPY remained modest as US equities remained resilient despite the political noise, at least during the regular hours. USD/JPY finished the day at 113.12.

Overnight, sentiment turned risk-off on headlines that president Trump asked FBI director Comey to stop an investigation against Trump’s former national security adviser. The Asian equity losses are modest, but the decline in US equity futures suggests that this case might have more impact than recent ones. The yen plays its safe haven roll. USD/JPY declined to the mid 112 area. Japanese machine orders were weaker than expected, but the focus for yen trading was on US politics. Dollar weakness propelled EUR/USD north of 1.11.

There are no US eco data today. In EMU, only the final HICP inflation report will be released. The impact on FX trading will be limited. The focus for global trading will be on the last flaring up of political turmoil in the US. There were already several ‘issues’ on Trump that caused high profile press headlines, but until now, the impact on markets was negligible. The jury is still out, but we think that the overnight report of the NYT might be more important than previous incidents. It risk delaying or even aborting the implementation of a coherent policy an tax, deregulation on other issues that are important for markets. US equities were incredibly resilient of late, but this might be the trigger for a more bumpy ride.

On the currency markets, such a scenario should favour the safe havens like the yen and, to a less extent, the Swiss franc. The USD negative sentiment also support more EUR/USD gains. There is no reason to row against EUR/USD uptrend, but a reversal in the EUR/JPY rally might also slow the rebound of EUR/USD. So, even if political tensions in the US deepen, the EUR/USD rally might slow.

Short term assessment

From a technical point of view, the USD/JPY rebound ran into resistance last week. Till yesterday it was not more than a correction on a 6-big figure rally. However, the pair is nearing the previous top/break-up area at 112.20.

Currencies

R2 1,13 -1dR1 1,1145EUR/USD 1,1105 0,0112S1 1,0778S2 1,0341

Few eco data

US political event risk the driver

Dollar in the defensive as US political and eco noise linger

Dollar remains under pressure as US political uncertainty grows

Wednesday, 17 May 2017

P. 5

Return action below this level would indicate that the recent uptrend is aborted and that further return action in the 108.13/114.37 range is possible. We amend our short-term assessment on USD/JPY from positive (buy-on-dips) to neutral with downside risks.

Last week, it looked that EUR/USD could revisit the 1.0821/1.0778 support (gap). However, Friday’s US data and political uncertainty finally propelled EUR/USD north of the 1.0821/1.0778 to 1.1023 range. This break improved the technical picture. Next resistance stands at 1.1120 (62% retracement) and at 1.1366 (correction top).

EUR/GBP jumps on broad based euro strength

Yesterday, UK April inflation (2.7% Y/Y) and core inflation (2.4% Y/Y) rose more than expected. However, the data didn’t help sterling. EUR/GBP pierced the 0.8509/31 resistance after the CPI data. The technical break and broad-based euro strength reinforced EUR/GBP buying. There was probably also an aspect of sterling weakness. A decision of the EU Court of Justice that the free-trade agreement between the EU and Singapore needs approval of the national parliaments, raising the chance that national parliaments will have an important say in the approval of a post-Brexit EU-UK trade deal. EUR/GBP closed the session at 0.8593 (from 0.8510). Cable showed no clear trend and closed the session at 1.2917. However, sterling hardly gaining ground against a struggling dollar is a sign of sterling weakness.

Today, UK labour market data will be published. For now, there is no big impact expected of cooling growth on the labour market. The markets is still a bit more sensitive to negative rather than to a positive news. The wage data are a wildcard. A substantial positive surprise in wages might be slightly supportive for sterling. However, this is not our favoured scenario. Of late, the positive sterling sentiment eased and euro strength prevailed in EUR/GBP trading. For now, we don’t row against the EUR/GBP uptrend. Recently, EUR/GBP was locked in a ST sideways range (0.83/0.85) after a substantial decline in March/April. The pair developed a bottoming out pattern with 0.84/0.8330 as a solid bottom. The breach of 0.8509/31 (previous ST tops) improved the technical picture. We continue to prefer a EUR/GBP buy-on-dips approach. Longer term, Brexit remains potentially negative for sterling.

R2 0,8881 -1dR1 0,8854EUR/GBP 0,8586 0,0072S1 0,8314S2 0,8304

EUR/GBP: jumps north of ST range top

GBP/USD is holding a tight range just below 1.30. Sterling fails to profit from USD softness

Wednesday, 17 May 2017

P. 6

Wednesday, 17 May Consensus Previous Japan 01:50 Machine Orders MoM / YoY (Mar) A 1.4%/-0.7% 1.5%/5.6% 06:30 Industrial Production MoM / YoY (Mar F) A -1.9%/3.5% -2.1%/3.3% 06:30 Capacity Utilization MoM (Mar) A -1.6%- 3.2% UK 10:30 Claimant Count Rate (Apr) -- 2.2% 10:30 Jobless Claims Change (Apr) -- 25.5k 10:30 Average Weekly Earnings 3M/YoY (Mar) 2.4% 2.3% 10:30 Weekly Earnings ex Bonus 3M/YoY (Mar) 2.1% 2.2% 10:30 ILO Unemployment Rate 3Mths (Mar) 4.7% 4.7% 10:30 Employment Change 3M/3M (Mar) 21k 39k EMU 11:00 Construction Output MoM / YoY (Mar) --/-- 6.9%/7.1% 11:00 CPI MoM / YoY (Apr) 0.4%/1.9% 0.8%/1.5% 11:00 CPI Core YoY (Apr F) 1.2% 1.2% Events 11:30 Germany to Sell €1B 2.5% 2046 Bonds Greek Parliament To Vote On Additional Reform Measures

10-year td -1d 2-year td -1d Stocks td -1dUS 2,29 -0,04 US 1,27 -0,02 DOW 20979,75 -2,19DE 0,42 0,00 DE -0,66 0,01 NASDAQ 6169,87 20,20BE 0,82 0,00 BE -0,50 0,01 NIKKEI 19814,88 -104,94UK 1,13 -0,01 UK 0,14 0,00 DAX 12804,53 -2,51

JP 0,04 0,00 JP -0,17 0,00 DJ euro-50 3641,89 0,01

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,03 1,65 0,63 Eonia -0,3670 -0,00905y 0,21 1,88 0,81 Euribor-1 -0,3710 0,0030 Libor-1 1,0008 0,008310y 0,81 2,22 1,17 Euribor-3 -0,3310 -0,0010 Libor-3 1,1794 -0,0001

Euribor-6 -0,2500 0,0010 Libor-6 1,4227 -0,0139

Currencies td -1d Currencies td -1d Commodities td -1d

EUR/USD 1,1105 0,0112 EUR/JPY 124,85 0,11 CRB 182,14 -0,60USD/JPY 112,43 -1,04 EUR/GBP 0,8586 0,0072 Gold 1243,00 9,50GBP/USD 1,2933 0,0022 EUR/CHF 1,0918 -0,0023 Brent 51,29 -0,69AUD/USD 0,7431 0,0008 EUR/SEK 9,736 0,0397USD/CAD 1,3594 -0,0019 EUR/NOK 9,3885 0,0078

Calendar

Wednesday, 17 May 2017

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 VIA OUR KBC RESEARCH APP (iPhone, iPad, Android) 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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