Wednesday, 06 July 2016

P. 1

Rates: More risk-off pushes core bonds higher. Panic today or return of calm?

Strong core bond session yesterday amid renewed risk-off sentiment. The risk-off continued in Asia, but lost some momentum going towards the European open. Signs of stress yesterday make us cautious and if US equities would not be at current still lofty levels, we would think an exhaustion move is nearby. Bonds are very expensive.

Currencies: Sterling sell-off reaccelerates

Yesterday, the global risk-off trade via EUR/JPY also pushed EUR/USD and USD/JPY south. Overnight, the risk-off trade deepened, continuing yesterday’s correction. Sterling is hit very hard, with cable again setting the 31-year low. A breather on the recent sterling decline is likely. However, the trend remains firmly south.

Calendar

• The rebound on US equity markets ran into resistance when the US returned

from the long weekend as sentiment turned risk-off. The S&P dropped 0.68% led by materials and energy shares. This morning, sentiment in Asia remains risk off. Japanese stocks underperform (-2%) due to renewed yen weakness. Chinese stocks outperform, trading slightly positive.

• Theresa May has established a strong lead in the race to become Britain’s Prime Minister, securing the votes of half of all Tory MPs in the first round of voting aimed at whittling down a list of five candidates to a shortlist of two in the party’s leadership contest.

• The FBI recommended that no criminal charges be filed over Hillary Clinton’s use of private email servers while she was Secretary of State, but harshly criticized the presumptive Democratic presidential nominee for being extremely careless with the nation’s secrets.

• Brent crude oil prices dropped below $48/barrel this morning, nearing key support levels. Risk-off sentiment pushed oil prices lower yesterday with inventory data delayed due to the Independence Day holiday. Gold rose above the post-Brexit highs, reaching its lowest level in more than two years.

• With vote counting after the Australian elections entering its fifth day, the coalition government has still a chance to secure a majority in Parliament, media reported, but a final reckoning may not be known for days, possibly weeks.

• Today, the US eco calendar heats up with the trade balance and non-manufacturing ISM. The Swedish Riksbank will decide on rates and the Fed will release the minutes of its latest FOMC meeting. ECB President Draghi speaks at an ECB Conference.

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, 06 July 2016

P. 2

More risk-off, juicy gains for core bonds. Panic nearby?

On Tuesday, markets remained in risk-off modus, showing the usual direction in the various markets in such a context. The eco releases had no relevance. The post-Brexit risk-on rally was grossly overdone and markets are re-assessing the consequences as signs of stress emerge. The parallel increase of both equities and core bonds was ultimately untenable. The European equity losses (about 1.8%) were more outspoken than on Monday, while US losses remained moderate (-0.7%). Concerns about Italian banks remained talk of the town, but bank shares didn’t fare the worse.. The freezing of various real estate funds, as well as reports that pension funds were active buying duration, as the fall in rates resulted in pension underfunding is a bad omen for markets and suggests market stress may be expanding. Risk off sentiment supported Bunds and US Treasuries. The latter outperformed. The US-German 10-yr yield spread narrowed 9 basis points (to 154 bps) since last Wednesday.

In a daily perspective, both the German and the US yield curve bull flattened. German yields were 1.1 (2-yr) to 5.9 (30-yr) basis points lower, while US ones declined 4 (2-yr) to 7.1 bps (30-yr). All German tenors are setting new post Brexit closing lows. Technically still more relevant, the US 30-year yield now has broken through the previous “all-time” lows, trading at 2.155%, while the 10-year US yield is intensively testing 1.38% yield support (close 1.376%, now at 1.3465%). The US 2-yr yield at 0.55% is closing in on the 0.50% IOER (Fed) rate, as ever more Fed rate hike expectations are priced out. The First Fed rate hike is fully priced for early 2019. UK yields fell up to 5.9 bps (30-yr). Peripheral bond spreads widened 6 to 8 bps in the risk-off context, nothing excessive. Spain slightly underperformed Italy ahead of Thursday’s auction.

US eco data in focus; some ECB/Fed governors speak

The US eco calendar heats up today (EMU one is empty) with the trade balance and non-manufacturing ISM. After having weakened sharply in May, from 55.7 to 52.9, the US non-manufacturing ISM is forecast to show a limited rebound in June, to 53.3. We see risks for an upward surprise. Consumer sentiment improved and spending picked up, boding well for activity in the sector. The May US trade balance is forecast to show a widening in the deficit from $37.4 billion to $40 billion. Imports are forecast to rise, while exports will remain sluggish.

Rates

US yield -1d2 0,5654 -0,02395 0,9399 -0,041810 1,3615 -0,058930 2,1368 -0,0539

DE yield -1d2 -0,6800 -0,01105 -0,6080 -0,027010 -0,1870 -0,046730 0,3625 -0,0280

US 30-yr yield drops below 2015 low (support) to the lowest level in more than 50 years

Japanese 20-yr yield touches 0% (graph. German 15-yr yield is negative and even the Swiss 50-yr bond yield (June 2064) is now

negative.

T-

Stress increased in markets

Safe havens thrive well, while riskier assets are sold

US & German yields are setting new lows.

Gold & silver continue to rally

Peripherals still hold up rather well

Upside risk final EMU PMI ,but downside risks EMU retail sales

Fed Dudley speaks

Wednesday, 06 July 2016

P. 3

ECB’s Draghi and Nouy speak at the statistical conference, not the place to expect many policy-related comments. ECB’s Villeroy will give a key-note speech at the Paris Europlace Conference, but it is devoted to capital markets and the financial industry. The Fed will also release the Minutes of its latest FOMC meeting. In June, the Fed didn’t change its policy, but it lowered its projected rate path substantially (also the LT neutral rate). For 2016, the mean projection was two rate hikes, but six governors (1 in March) saw only 1 hike. Yellen also emphasised the low productivity growth and the possibility that rates may remain lower for a very long period of time. Markets will look to how the debate on these matters evolved. Fed’s Tarullo is scheduled to speak. He is a dovish-leaning Washington-based Fed board governor.

Today, Germany taps the Schatz 0% Jun2018 for an amount of €4B. The current outstanding amount is €10B and the yield -0.671%. It was first offered on May 3 (€5B) and topped up end May 31 (€5B) with issuance prices at 101.085% (-0.51% average yield, bid/cover 2.16) and at 101.113% respectively (-0.55% average yield bid/cover 1.58). Despite low yields, previous auctions were well bid. Since, Brexit occurred and 2-yr yields are more than 10 bps lower.

Overnight, risk off sentiment continued for the second session in a row, with the Nikkei (-2.3%), Kospi (-1.9%) and Hang Seng (-1.7%) major causalities. Chinese equities again outperform with minor gains. The Yen gains (101.10) as well as gold (1369) and silver, while cable is hammered (1.288) and EUR/USD modestly lower. US T-Note is flat following a strong session yesterday. So, the outlook for core bonds remains positive going towards the European opening, but the Asian risk-off has lost some momentum in the past hour.

Today, the eco calendar contains US non-manufacturing ISM and trade balance. We see upside risks for the non-manufacturing ISM, but expect no lasting impact on markets There were yesterday/overnight some signs of stress as UK real estate funds closed and pension funds are desperate buying duration, while sterling is hammered. However, the VIX and VDAX are still at lower levels. Recent moves have made long term core bonds very expensive, but there is no sign of a reversal yet. The new risk-off equity selling has probably further to go. So, we keep our positive view on bonds, but partial profit taking on longs may not be a bad idea, especially in case of an exhaustion move. The German 10-yr yield at -0.25% would be a good opportunity to re-assess the outlook for core bonds. Technically, pictures for core bonds are still bullish, but overbought signals are flashing (already for 2 weeks).

R2 170 -1dR1 168,68BUND 167,92 0,9400S1 165,68S2 163,61

German Bund: moves again and may re-test the post Brexit spike higher as risk-off is again prominently present

US Note future: Agian upside momentum, with post-Brexit high (134-07) now within reach.

US

Wednesday, 06 July 2016

P. 4

Yen jumps on ‘by default’ risk-off buying

On Tuesday, sentiment turned further risk-off. Uncertainty on the Italian banking sector was still mentioned as the driver behind the move. However, uncertainty on global growth for sure also became a factor. Initially, the impact on currencies was mostly limited to a further decline of sterling. EUR./USD and USD/JPY were hardly affected. This pattern changed later. The risk-off trade finally pushed EUR/JPY lower. EUR/USD and, to a lesser extent also USD/JPY, were also infected by global uncertainty. EUR/USD finished the session at 1.1076 (from 1.1154). USD/JPY closed the day at 101.74 (from 102.56).

This morning, Asian markets are again into risk-off modus. Japanese government bond yields are turning negative for maturities up to almost 20-year. Regional indices nosedive with Japan underperforming (losses of 2%) and China outperforming (minor gains). For now, the decline of the yuan is no additional negative for Chinese equities anymore. There were again very brutal moves in several yen cross rates. GBP/JPY dropped from the 132.50 area at the open to set an intraday low below 129 (currently 130.30). USD/JPY trades near 101. The risk-off trade and the decline of EUR/JPY also weigh on EUR/USD, but the losses are contained. EUR/USD is changing hands in the mid 1.10 area.

Today, the US trade balance and non-manufacturing ISM will be published. The non-manufacturing ISM is forecast rebound slightly to 53.3. We see risks for an upward surprise due to better data from the consumer sector for late. The US trade deficit is forecast to have widened from $37.4 billion to $40 billion. With imports rising and exports to stay sluggish, the risk is for a wider deficit. Especially for the ISM, we assume that (currency) markets are more sensitive to negative news than to positive one. The Fed will also release the Minutes of its latest FOMC meeting. In June, the Fed didn’t change its policy, but it lowered again substantially its projected rate path (also the LT neutral rate). Markets will look how the debate on the rate path evolved. Is the Washington boards ahead of the regional governors (except for Bullard) on the subject of low rates for very long? The data and the Fed minutes might affect USD trading intraday. However, global uncertainty will be the main driver. Yesterday evening and this morning the ‘usual’ risk-off’ mechanism was again at work. USD/JPY and EUR/JPY took the lead in the decline of the major currency cross rates. This time

Currencies

R2 1,1428 -1dR1 1,1189EUR/USD 1,1052 -0,0077S1 1,0913S2 1,0822

EUR/USD & USD/JPY drifting lower as risk-off persists.

EUR/USD: drifting lower in the range as risk-off weighs USD/JPY nearing 100-barrier as global uncertainty rises.

Tion

Risk-off trade continues in Asia

Yen jumps against sterling and, to a lesser extent against euro and dollar

Eco calendar modestly interesting.

Global risk-off trade to dominate

Topside of USD/JPY and EUR/USD to remain well protected

Wednesday, 06 July 2016

P. 5

there was also again a modest fall-out on EUR/USD. This is a global move which is often not linked to any specific news topic. Uncertainty on the fall-out from Brexit is a long-term negative for the euro, but there is no one-to-one relationship with the daily moves of the euro. The decline of global yields narrows the interest rate differential between the dollar and the euro. In theory this is a positive for the euro. Even so, if the risk-off trade continues, we assume further downside risk for USD/JPY and EUR/USD.

Since last Tuesday, riskier markets staged an impressive post-Brexit risk-on-rebound as investors embraced the idea of a prolonged period of easy global monetary conditions. This rebound had only a limited impact on the major currencies, except for sterling. If anything, it caused some tentative dollar softness. Until yesterday, there was no clear post-Brexit driver for EUR/USD and USD/JPY trading. We maintain the working hypothesis is that the global market volatility due to the fall-out from Brexit isn’t over. After the Brexit-vote, we assumed that EUR/USD entered a sell-on upticks market as new pockets of uncertainty might pop up. The post-Brexit intraday top (1.1189) is a first short-term tough resistance. First support comes in at 1.0913 (24 June low) and 1.0822 (March correction low).The context is also intrinsically yen positive, but markets stay reluctant to push USD/JPY aggressively below 100 as they feel uncomfortable with the risk of Japanese (or even coordinated) action.

Sterling sell-off reaccelerates

Yesterday, EUR/GBP broke beyond the post-Brexit top just north of 0.84. Sterling selling accelerated in the run-up to publication of the BOE financial stability report . The global risk-off context and investors anticipating on more BoE stimulus pushed cable to a 31-year low. The BoE reduced the countercyclical capital requirements, supporting banks’ capacity to lend. The sterling decline slowed temporarily after the FPC action, but the negative risk sentiment put sterling again under pressure. Cable closed the session at 1.3022 (from 1.3287). EUR/GBP closed the session at 0.8505.

This morning, sterling was again under have pressure in Asia. GBP/JPY tumbled from the 132.50 area to fill bids below 129 at some point (currently 130 40 area). The sell-off also spilled over to other sterling cross rates. Cable dropped to the 128 area. EUR/GBP spiked temporary north of 0.86. The BOJ shop price index declined further to -2.0% Y/Y. However, the sterling decline was a global repositioning rather than a reaction to UK data. Later today, there are no important data in the UK. After the sell-off yesterday and this morning., the sterling decline might take a breather short-term. However, with global and UK uncertainty still sky-high and with the BoE still considering further easing, we don’t try to catch the falling knife of sterling. EUR/GBP 0.8770 is the next high profile resistance on the charts.

R2 0,877 -1dR1 0,8627EUR/GBP 0,8559 0,0159S1 0,8379S2 0,7994

EUR/GBP jumping to new post-Brexit top

GBP/USD: sterling again in free-fall

Wednesday, 06 July 2016

P. 6

Wednesday, 6 July Consensus Previous US 13:00 MBA Mortgage Applications -- -2.6% 14:30 Trade Balance (May) -$40.0b -$37.4b 15:45 Markit Services PMI (Jun F) 51.3 51.3 16:00 ISM Non-Manf. Composite (Jun) 53.3 52.9 UK 01:01 BRC Shop Price Index YoY (Jun) A -2.0% -1.8% 10:00 New Car Registrations YoY (Jun) -- 2.5% Germany 08:00 Factory Orders MoM YoY (May) A0.0%/-0.2% -2.0%/-0.5% Spain 09:00 Industrial Output SA YoY (May) 0.0%/2.2% -0.0%/2.7% Sweden 08:00 PES Unemployment Rate (Jun) A 3.8% 3.6% 09:30 Riksbank Interest Rate -0.50% -0.50% Events 08:30 Bank of France's Villeroy opens Paris Europlace conference 09:00 ECB President Draghi Speaks at ECB Statistics Conference in Frankfurt 15:00 Fed's Tarullo Speaks on Regulation and Monetary Policy 17:30 ECB’s Nouy Speaks at ECB Statistics Conference in Frankfurt 20:00 U.S. Fed Releases Minutes from June 14-15 FOMC Meeting Denmark Bond Auction (0.25% 2018 & 1.75% 2025) Germany Schatz Auction (€4B Jun2018)

Calendar

Wednesday, 06 July 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 1,36 -0,06 US 0,57 -0,02 DOW 17841 17840,62DE -0,19 -0,06 DE -0,68 -0,02 NASDAQ for Exch - NQI #VALUE!BE 0,17 -0,05 BE -0,63 -0,05 NIKKEI 15379 15378,99UK 0,77 -0,07 UK 0,10 -0,04 DAX 9532,61 9532,61JP -0,27 -0,02 JP -0,35 -0,01 DJ euro-50 2813 2812,88

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,323 -0,0083y -0,241 0,789 0,480 Euribor-1 -0,36 0,00 Libor-1 USD 0,48 0,485y -0,169 0,930 0,548 Euribor-3 -0,29 0,00 Libor-3 USD 0,51 0,5110y 0,269 1,265 0,877 Euribor-6 -0,19 0,00 Libor-6 USD 0,61 0,61

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,1052 -0,0076 EUR/JPY 111,61 -2,03 189,6598 1368,49 48,06USD/JPY 101,02 -1,11 EUR/GBP 0,856 0,0160 - 1d -4,60 26,69 -1,49GBP/USD 1,2907 -0,0337 EUR/CHF 1,0811 0,0000AUD/USD 0,7430 -0,0085 EUR/SEK 9,4457 0,05USD/CAD 1,3006 0,0131 EUR/NOK 9,3170 0,06