Monday, 13 June 2016

P. 1

Rates: Risk-off sentiment drives core bonds ever higher

The calendar is empty today, which suggests a technically, sentiment-driven trading session. German bonds may venture in negative territory, but overbought conditions, abundant supply this week and the upcoming FOMC meeting might eventually lead to some profit taking. Caution may be needed.

Currencies: Brexit fears and global uncertainty weigh on EUR/USD and on USD/JPY

On Friday, a new poll suggesting a lead for Brexit sent EUR/USD further below 1.13. This morning, USD/JPY is nearing the key 105.55 as global tensions mount. With no eco data on the agenda, global uncertainty will continue to guide currency trading. Sterling is also fighting an uphill battle against the euro and the dollar. The EUR/GBP 0.7947 resistance is under test.

Calendar

• US Equities dropped 1% on Friday, as sentiment turned risk-off ahead of the

weekend. The S&P fell from its 10-month high led by energy shares. This morning, Japanese stocks are hammered, losing more than 3% as USD/JPY drops below 106. Elsewhere, losses are more contained.

• Growth in Chinese production and retail sales stabilized in May, broadly in line with expectations, but fixed-asset investments missed all expectations growing at its slowest pace since 2000. The National Bureau of Statistics warned that downward pressures still exist in the economy.

• Brexit polls over the weekend show a mixed picture. Late on Friday, the ORB/Independent poll showed the leave camp had a 10 point lead over remain (55%/45%). The Times/YouGov poll showed only a slim lead of the leave (43%/42%) camp, while the Opinium/Observer poll showed a 2 point lead for the remain camp (44%/42%).

• Following a 3% drop on Friday, the Brent crude oil price extends its decline this morning, trading lower for a 3rd consecutive session and hovering around the psychological barrier of $50/barrel. Weak Chinese data weigh on sentiment.

• Rating agency Moody’s placed on Friday Iceland’s Baa2 government bond rating on review for upgrade. Fitch affirmed France at AA with a stable outlook and the UK at AA+ with also a stable outlook. The rating agency added that a UK vote to leave the EU would be a moderate credit negative for the country.

• Today, the eco calendar is empty, both in the US and euro zone. ECB’s Weidmann, Nouy, Hansson and Costa 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

Monday, 13 June 2016

P. 2

Safe haven core bonds unstoppable!!

On Friday, core bonds eked out some minor (Bunds) to moderate gains (US) as European equities, oil and other commodities were sharply hit in a risk-off environment. A UK poll showed the Leave camp well ahead of the Remain and increased the appetite for bonds. In a daily perspective, the US curve shifted by 3.6 bps (30-yr) to 5.4 bps (5-yr) lower, the belly outperforming. The German yield curve bull flattened with yields 0.2 bps (2-yr) higher to 4 bps (30-yr) lower.

German, Swiss, UK and Japanese 10-yr yields all set new all-time lows, emphasizing the excellent bond sentiment. French and Italian production data surprised on the upside of expectations, but were ignored. June US Michigan consumer confidence was marginally better than expected, but slightly below prior figure. However, Michigan long term inflation expectations dropped to 2.3% from 2.5% previously, an all-time low and certainly a development that will concern the FOMC. The US T-Note future set an intra-day high after the release, but was already rising prior to the publication. The OECD called on the ECB to make a clear commitment not to raise interest rates over the coming two years even if inflation hits the 2% target. Recent comments by ECB governors Nowotny, Smets, Weidmann, Jazbec and Constancio show that the central bank doesn’t seem to be in a hurry to do so though. Perhaps even more important, they no longer expect the ECB to take extra action at all. Technically, the German 10-yr yield set another all-time low, at 0.009% ,and narrowly missed breaking into negative territory. The US 10-yr yield tests the key support at 1.64%; which is the downside of the sideways trading range since February, but no clean break occurred yet. A break would bring the “all-time” lows at 1.38% into play. The US 30-year yield dropped further after it broke below the key 2.5% threshold last Wednesday.

On intra-EMU bond markets, 10-yr yield spread changes versus Germany widened only noticeable for Portugal (5 bps) and Greece (13 bps). Other country spreads widened 1 –to-2 bps despite risk aversion.

Market calendar is empty, but FOMC meeting looms

The eco calendar is empty today, both in the US and euro zone. ECB Weidmann speaks in Frankfurt at the 2016 Cash symposium, but he already spoke on Friday. He is concerned about the financial risks created by an overly accommodative monetary policy and surely would like the ECB to change tack as fast as the economic situation allows. ECB supervisory chair Nouy is scheduled to speak before the EU parliament, but she won’t address monetary policy. Finally, ECB/Estonian central bank Hansson speaks about QE before the Estonian parliament. We don’t expect market reactions to their comments.

Rates

US yield -1d2 0,7183 -0,05275 1,1411 -0,071210 1,6232 -0,055030 2,4401 -0,0398

DE yield -1d2 -0,5450 -0,01005 -0,4260 -0,012010 0,0160 -0,017030 0,5730 -0,0538

Bunds profit from lower equities and oil prices, setting day after day new highs

German 10-yr yield below 4 month sideways range and now on its way to negative territory. Will it happen today?

US-Germ

German 10-yr yield on verge of testing 0% threshold.

Return of risk aversion hits riskier assets, while core bonds advance.

German curve bull flattens, while belly of US curve outperforms

Peripheral spreads only modestly hit by risk off sentiment

Monday, 13 June 2016

P. 3

Italy kicks off heavy EMU bond supply

Italy starts this week’s EMU bond supply by tapping the on the run 3-yr BTP (€1.5-2B 0.1% Apr2019), 7-yr BTP (€2.5-3B 0.95% Mar2023), 30-yr BTP (2.7% Mar2047) and the off the run 30-yr BTP (4.5% Sep2044). The two long-term bonds will be tapped for a combined €1.5-2B. The BTP’s on offer cheapened slightly in ASW spread terms going into the auction. On the Italian curve, the Apr2019 and especially Sep2044 BTP trade cheap while the Mar2023 and Sep2044 BTP’s are rather expensive. Tomorrow, the Finnish debt agency sells the on the run 10-yr RFGB (€1B 0.5% Apr2026). On Wednesday, the German Finanzagentur hols a €4B 10-yr Bund auction (0.5% Feb2026). On Thursday, the French treasury taps three OAT’s (0.5% Nov2019, 0% May2021 and 1.75% May2023) for the relatively low amount of €5-6B. Additionally, the treasury will try to raise €0.75-1.25B via inflation-linked bonds. The Spanish debt agency sells the 3-yr Bono (0.25% Jan2019), 5-yr Bono (0.75% Jul2021) and 10-yr Obligacion (1.95% Apr2026). The issue volumes still need to be determined. This week’s auctions won’t be supported by redemptions.

Risk aversion: negative GE 10y yield unavoidable?

Overnight, Asian equity markets lose ground following weakness in Europe and the US on Friday. Japan underperforms on the back of the stronger yen. Chinese production data and retail sales for May printed in line with consensus while a gauge for business investments disappointed. The IMF warned on China’s ballooning corporate debt though. Increasing Brexit-fears weigh on risk sentiment as well. The US Note future gains minor ground, suggesting a decent opening for the Bund (with negative German 10-yr yield?) as well.

Today’s eco calendar is empty. We expect technical and sentiment-driven trading. The German 10-yr yield reached another minor new all-time low on Friday (0.009%). From current levels, it’s only a small step to test the 0% boundary, even though we’re no fan of Bunds at such lofty levels. Last week’s price action suggests that the upside in core bonds isn’t exhausted yet, though we entered overbought conditions. The US Note future broke above the upper bound of the sideways range (128-28+ to 131-07+) following the payrolls miss. Going into Wednesday’s FOMC meeting, which could slow trading, we think markets are too dovish positioned. That could limit the upside for US Treasuries with some investors perhaps already taking some profit on Treasury gains.

R2 166,63 -1dR1 164,98BUND 164,87 0,1600S1 163,06S2 161,46

German Bund (Sept. contract!!): New high. German 10-yr yield sets record low. Closing in on 0%

US Note future (September contract!!): June rate hike bets dashed after horrible June payrolls & Yellen speech

US-Germ

Monday, 13 June 2016

P. 4

Brexit fears send EUR/USD and USD/JPY lower

Friday was an outright risk-off day on global markets. On Thursday, modest equity losses went hand-in-hand with a rebound of the dollar against the euro. On Friday, the major USD cross rates were initially largely disconnected from the global risk-off trade and from the ever lower core bond yields. EUR/USD and USD/JPY initially held tight ranges respectively near 1.13 and in the high 106 area. Late in the session, a poll on the UK EU referendum showed a big lead for Brexit, pushing EUR/USD further south. EUR/USD closed the session at 1.1251 (from 1.1316). USD/JPY showed stronger resilience and finished the week at 106.91 (from 107.10).

Overnight, Asian equities are heavily sold. Japanese indices underperform with losses of over 3%. On Friday, the losses of USD/JPY were modest given the global risk-off context. This morning, the yen is again favoured as global investors are looking for shelter as uncertainty spreads with Brexit and the Orlando shooting the most obvious sources. Chinese production and retail sales were close to expectations, but suggest that the pace of growth is stabilizing. Commodities show a mixed picture. Oil extends the correction lower, while gold is setting new short-term highs. Even so, the risk-off sentiment weighs slightly on the likes of the Aussie dollar. AUD/USD dropped below 0.74. EUR/USD touched a short-term correction low in the 1.1232 area , but returned to the 1.1250 area, even as sentiment on risk deteriorates further.

The eco calendar is empty today, both in the US and euro zone. ECB Weidmann speaks in Frankfurt at the 2016 Cash symposium, but he already spoke on Friday. He is concerned about the financial risks created by an overly accommodative monetary policy and surely would like the ECB to change tack as soon as the economic situation allows. Trading in the major USD cross rates will be driven by global market sentiment. The Brexit-fears, uncertainty over the global economic outlook (including China) and terror fears suggest that global sentiment will remain risk-off in Europe and in the US. At the end of last week, the impact on EUR/USD and on USD/JPY was sometimes a bit uneven. For now, it looks that Brexit uncertainty is gradually becoming more euro negative. Global uncertainty is pushing USD/JPY closer to the 105.55 correction low.

Currencies

R2 1,1616 -1dR1 1,1416EUR/USD 1,1258 -0,0041S1 1,1058S2 1,0822

EUR/USD lower as Brexit and other issues of global uncertainty weigh

USD/JPY nears key 105.55 correction low

Tion

EUR/USD under pressure as Brexit fears spook market sentiment

Asian markets start in risk-off modus.

USD/JPY nears 105.55 support.

EUR/USD holds near 1.1250 as Brexit uncertainty weighs

Global sentiment on risk will drive currencies. today

Sharp decline of EUR/JPY remains important barometer

Monday, 13 June 2016

P. 5

Pressure is mounting on the BOJ to do ‘something’ at this week’s policy meeting. However, the question is whether any action aside from FX interventions will help to stop the yen rise. For now, we assume that it’s too early for outright currency interventions. So, a test/break of the 105.55 low is likely.

Technically, the dollar rebounded in May on more hawkish Fed comments that opened the door for a possible June rate hike. Our basic scenario was (and still is) that the US economy is strong enough to allow the Fed to implement two rate hikes this year. However, the May payrolls postponed a rate hike and triggered a repositioning lower of the dollar. We expect some consolidation in EUR/USD, as markets take time to assess the timing of the next Fed rate hike. Brexit is a wildcard for EUR/USD trading. Short-term Brexit uncertainty become a slightly negative for the euro. A global USD rally blocked the downside of USD/JPY early May. The high 111 area was a strong resistance, but a real test didn’t occur. The pair was already off the recent highs before the payrolls and the decline accelerated after the release. With the Fed rate hike probability declining and global sentiment weakening, any rebound of USD/JPY should be short-lived. A break below 105.55 would be a high profile warning for USD/JPY longs. We don’t row against the USD/JPY negative short-term trend.

Sterling hammered as Brexit fears mount

On Friday, sterling weakness prevailed again. The decline in equities and in oil reinforced tghe Brexit-uncertainty going into the weekend. Initially, the losses of sterling were modest. Later in the session, a poll showed a 10% lead for the leave camp at the June 23 EU referendum. The headlines hammered sterling against the euro and, even more against the dollar. EUR/GBP spiked temporary north of 0.79 to close the session at 0.7890 (from 0.7827). Cable dropped to close the session at 1.4257 (from 1.4458).

During the weekend, other polls showed a more balanced picture with the difference between leave and remain extremely small. However, sentiment clearly remains sterling negative in Asia this morning. Investors avoid sterling as uncertainty mounts going into next week’s referendum. CFTC statistics on Friday, showed that the market is positioned heavily short sterling but we don’t expect that position to be sterling supportive at this stage.

Today , the UK eco calendar is empty. So, global uncertainty and the Brexit debate will continue to set the tone for sterling trading. We expect sterling to remain in the defensive as the campaign on the EU-referendum intensifies. The break above 0.7750 was a first indication of further deteriorating sterling sentiment. We maintain a sterling negative bias. A test of the 0.80 barrier might be on the cards.

R2 0,8117 -1dR1 0,7947EUR/GBP 0,7923 0,0105S1 0,7753S2 0,7526

EUR/GBP: nearing 0.7947 resistance as Brexit uncertainty resurfaces

GBP/USD: Brexit fears prevail sending sterling lower in the range

Monday, 13 June 2016

P. 6

Monday, 13 June Consensus Previous Japan 01:50 BSI Large All Industry QoQ (2Q) A -7.9 -3.2 01:50 BSI Large Manufacturing QoQ (2Q) A -11.1 -7.9 China 04:00 Industrial Production YoY (May) A 6.0% 6.0% 04:00 Industrial Production YTD YoY (May) A 5.9% 5.8% 04:00 Retail Sales YoY (May) A 10.0% 10.1% 04:00 Retail Sales YTD YoY (May) A 10.2% 10.3% 04:00 Fixed Assets Ex Rural YTD YoY (May) A 9.6% 10.5% Sweden 08:00 PES Unemployment Rate (May) A 3.6% 3.8% Events 09:00 ECB's Weidmann Speaks in Frankfurt 14:00 ECB's Hansson Speaks on QE in Estonian Parliament 15:00 ECB's Nouy Speaks at EU Parliament Committee in Brussels 16:40 ECB's Costa Speaks at Panel in Poland Italy Bond Auction (€2B 0.1% 2019, €3B 0.95% 2023, €2B 4.75% 2044 & €2B 2.7%

2047)

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 1,62 -0,06 US 0,72 -0,05 DOW 17865 17865,34DE 0,01 -0,02 DE -0,55 -0,01 NASDAQ for Exch - NQI #VALUE!BE 0,44 0,00 BE -0,46 -0,02 NIKKEI 16019 16019,18UK 1,23 -0,02 UK 0,36 -0,01 DAX 9834,62 9834,62JP -0,16 -0,01 JP -0,28 0,00 DJ euro-50 2911 2911,11

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,329 0,0023y -0,137 0,931 0,805 Euribor-1 -0,35 0,00 Libor-1 USD 0,51 0,515y -0,009 1,093 0,942 Euribor-3 -0,26 0,00 Libor-3 USD 0,58 0,5810y 0,455 1,479 1,298 Euribor-6 -0,16 0,00 Libor-6 USD 0,72 0,72

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,1258 -0,0041 EUR/JPY 119,08 -1,93 192,8883 1283,4 50,04USD/JPY 105,79 -1,32 EUR/GBP 0,7927 0,0110 - 1d -2,23 18,19 -1,56GBP/USD 1,4196 -0,0251 EUR/CHF 1,0852 -0,0046AUD/USD 0,7386 -0,0025 EUR/SEK 9,3448 0,09USD/CAD 1,2793 0,0066 EUR/NOK 9,3072 0,08

Calendar

Monday, 13 June 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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