Friday, 01 July 2016 - Microsoft · Friday, 01 July 2016 P. 1 . Rates: Bund sold off sharply, while US Treasuries and UK gilts rally . A story based on “sources” triggered a nasty

Friday, 01 July 2016

P. 1

Rates: Bund sold off sharply, while US Treasuries and UK gilts rally

A story based on “sources” triggered a nasty Bund sell-off just at the closure of the cash market. Today, markets will look for reaction on the article from ECB governors. The overall climate remains positive for core and peripheral bonds. The long US weekend and maybe some slowing of the equity rally could keep bonds well bid.

Currencies: EUR/USD marginally lower on ECB rumours

Yesterday, EUR/USD and USD/JPY again largely decoupled from the risk-on rally. The dollar spiked temporary higher against yen and the euro on romours of a change in the ECB’s QE allocation. However, the USD rebound was soon reversed. Sterling remains under pressure as BoE Carney confirmed that the BoE will probably cut its policy rate in the near future.

Calendar

• US Equities extended their rally to a third straight session, approaching again

pre-Brexit levels. Despite optimism on Wall Street, Asian shares trade mixed this morning following a mixed bag of data.

• Bank of England governor Carney said yesterday his personal view was that they would need to cut interest rates further over the summer as growth will slow in the coming months. Carney added that a full assessment will take place in August, but an initial assessment of the damage caused will be made in July.

• The ECB is considering loosening the rules for its bond purchases to ensure enough debt is available to buy after the Brexit vote, Bloomberg reports quoting sources familiar with the matter. One person said some council members favour changing the allocation of bond purchases away from the size of the nation’s economy towards one more in line with outstanding debt.

• Chinese PMI’s showed a mixed picture this morning. The Caixin manufacturing PMI worsened significantly, for a second straight month suggesting that conditions are deteriorating at a slightly faster pace. The official non-manufacturing PMI however rebounded supported by improving new orders, business activity and selling prices.

• Japan’s manufacturing confidence stabilized at subdued levels in June, while sentiment in the services sector weakened from three months ago on weak consumption. Consumer prices in the country continued to fall.

• Rating agency S&P cut the long-term credit rating of the EU to AA from AA+, but raised its outlook to stable from negative after the UK decided to leave the bloc.

• Today, the eco calendar contains the euro zone (final) and UK manufacturing PMI, the euro zone unemployment rate and the US manufacturing ISM. ECB’s Weidmann, Coeur& and Nowotny 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


P. 2

Bund crashes, as ECB may reconsider purchases rules!

More choppy trading on core bond markets yesterday. Both the German Bund and US Note future traded volatile near opening levels for the whole European cash market. At 18h CET however, when the European cash market closed, Bloomberg ran an article based on ECB “sources” that due to the scarcity of bonds of some countries that fall under the ECB eligible criteria (bond yielding more than -0.40%), the ECB would consider changing the allocation of bond purchases away from the size of a nation’s economy toward one more in line with the outstanding debts of a country. That would, of course, favour e.g. Italian bonds, as it is the biggest EMU bond market and disadvantage the German market. The market reacted instantaneously and the Bund fell off a cliff just when the cash market closed. We cannot belief that the ECB should introduce such a measure that manifestly favour the most indebted countries and loosens fiscal discipline. It also follows German protest about an Italian banking plan to recapitalize its banks with taxpayers’ money. We would expect Germany to resist such an ECB plan, but investors took no risks and sold the Bund. We await eagerly more reactions from ECB governors.

In a daily perspective, the US yield curve shifts 3.4 to 5.8 bps lower, the very long end lagging. Changes on the German yield curve range between -0.1 bps (30-yr) and -0.9 bps (2-yr). The UK gilt curve bull steepened as the short end outperformed on Carney’s soft comments. The 2-year yield fell 10.9 bps (to 0.09%) while the 30-year yield dropped 7.5 bps. UK short end next to dip into negative territory?

US Treasuries and gilts on the contrary went higher! The former partly on end-of-month-end extension buying, but the drop at the shorter end (-5.5 bps 2yr) shows that (lower) rate expectations played a role too. UK gilts rose on signals from BoE Carney that rates might be cut in the next few months. Peripheral bonds profited too, but as it just got published when markets were closed we think the story may continue to restore effect today in the periphery. In a daily perspective, peripheral 10-year yield spread shed 7 to 9 bps (Greece -25 bps), but the ECB rumours may only be partially discounted. Are these rumours a reaction to the German resistance to the Italian banking plan, now that the ECB is also responsible for banking supervision? Whatever the reason, this is a story that will get more attention today.

Rates

US yield -1d2 0,5735 -0,05545 0,9706 -0,075610 1,4289 -0,079830 2,2294 -0,0914

DE yield -1d2 -0,6280 0,01705 -0,5350 0,020010 -0,0857 0,020430 0,4504 0,0243

Bund (black) & EuroStoww (orange): initially both up on monetary policy support, but finally the Bund crashed on rumours

US T-Note future (black) an,d S&P future: T-Note climbs nicely higher only temporarily impacted by Bund crash. Also short end curve

sharply higher(in prices). )

Bund crashes on ECB rumours about change in bond buying plan

US Treasuries rally on month-end extension buying and rate expectations

Peripheral spreads narrow

UK 2-yr bond yields towards negative territory


P. 3

When do we get the German reaction? In a daily perspective, the US yield curve shifts 3.4 to 5.8 bps lower, the very long end lagging. Changes on the German yield curve range between -0.1 bps (30-yr) and -0.9 bps (2-yr). The UK gilt curve bull steepened as the short end outperformed on Carney’s soft comments. The 2-year yield fell 10.9 bps (to 0.09%) while the 30-year yield dropped 7.5 bps. UK short end next to dip into negative territory?

US ISM in focus today

The eco calendar heats up today. According to the first estimate, the euro zone manufacturing PMI rose from 51.5 to 52.6, beating the market consensus. The final figure is expected to confirm this outcome (but some downside risks due to Brexit). The euro zone unemployment rate is expected to resume its downward trend in May, falling from 10.2% to 10.1%. In the US, the manufacturing ISM is expected to have stabilized at 51.3 in June. Regional data showed a mixed picture, but we believe that the risks are for an upward surprise due to cautious sign of improvement in demand from abroad.

Bund sell-off only nasty dream?

Overnight, risk sentiment is mixed in Asia, after another strong run on Wall street yesterday. Chinese equities are nearly flat. The Chinese business confidence indicators show an upturn in services sector (53.7 from 53.1), but lacklustre manufacturing: The official PMI stabilized at 50, while the Caixin measure that more tracks private sector declined to 48.6 from 49.2. Oil is marginally higher at €50/barrel following losses yesterday. So, risk sentiment is mixed to slightly higher. The US Treasury continues its march higher and the Bund recoups in the opening about half of its 150 ticks loss of yesterday (“rumour”)

R2 170 -1dR1 168,86BUND 166,4 -0,5200S1 165,68S2 163,61

Upside risks US ISM while downside risks final manufacturing PMI

German Bund: nasty sell-off. Overdone as article is likely not credible.

US Note future : 132-22+ is first minor supportheld and some followed by some renewed momentum.

US


P. 4

Today’s eco calendar contains US ISM and EMU manufacturing PMI. We see upside risk for the former, while Brexit may already have a slight negative effect on the final EMU figure. At this stage, we don’t expect eco data to impact markets, unless the final EMU PMI would show a big impact already (which is unlikely as only about 15% of the respondents will have answered after the preliminary PMI). We look for comments on the rumours article from Bloomberg. In other rumours/comments, it is mentioned that the ECB may also look for additional stimulus. Following the BoE comments and similar hopes in the US, that’s still bond positive. So the Bund may recoup more ground, the shorter end of the EMU curve has less potential, therefore the curve may flatten. Peripheral spreads may narrow. We don’t exclude a similar reaction of the US curve, helped by a long holiday weekend . In the wake of the Brexit-vote markets are looking for a new equilibrium. Central banks opened the liquidity spigot. The short term technical picture in the US Note future showed signs of topping off, but has apparently found new upside momentum. For the T-Note, 132-22+ support is a first short term reference, but a test failed. Similarly, the Bund tested the 165.68 support yesterday, but it held. So, global core bonds remained strong in the past days despite the risk-on correction. Therefore, we think that the downside in core bonds is well protected.

On intra-EMU bond markets, calm returned after the sharp spread widening last Friday and with key resistances reached. Fundamentals weaken, but ECB buying and the search for yield should compensate.


P. 5

EUR/USD and USD/JPY spike soon reversed

On Thursday, the global risk-rebound resumed soon. Markets grow ever more convinced that global monetary conditions will remain exceptionally loose. Initially, the equity gains had only limited impact on EUR/USD or USD/JPY. Late in the session, markets were spooked by rumours that the ECB might change the allocation of its QE bond buying, considering the amount of outstanding debt rather than the ECB capital key. The bund nosedived. Peripheral spreads dropped sharply. EUR/USD dropped temporary to the 1.1025 area. USD/JPY jumped to the 103.25 area. USD/JPY maintained its gains as the equity rally continued. The pair closed the session at 103.20 (from 102.83). EUR/USD finished the session little changed at 1.1106 (from 1.1125)

Overnight, the official Chinese PMI showed a stabilisation in manufacturing (50.0) and an improvement in non-manufacturing. (53.7). The Manufacturing Caixin PMI on the other hand declined from 49.2 to 48.6. In Japan, the Takan report was slightly better than expected. Other indicators were close to expectations. Asian equities trade with a positive bias, but the gains are modest given the rebound in the US yesterday. USD/JPY gradually unwinds yesterday’s spike (currently at 102.75) The gains in commodities are modest. This is also the case for the Aussie dollar( AUD/USD 0.8465). EUR/USD has also reversed the spike after yesterday ECB rumours and this again in the 1.1090 area.

The eco calendar heats up today with the final EMU manufacturing PMI, the euro zone unemployment rate and US manufacturing ISM. ECB’s Nowonty, Coeuré and Weidmann and Fed’s Mester are scheduled to speak. According to the first estimate, the euro zone manufacturing PMI rose from 51.5 to 52.6. The final figure is expected to confirm this outcome, but we see downside risks as the Brexit might already have an impact. In the US, the manufacturing ISM is expected to have stabilized at 51.3 in June. Regional data showed a mixed picture, but we believe that the risks are for an upward surprise..

Earlier this week, the risk-on dynamics was strong and it’s dangerous to row against a strong repositioning. If this rally were to slow going into the long weekend in the US, EUR/USD might slightly lose ground. It is also interesting to see whether there is any follow-through action on yesterday’s ECB rumours. We look out for comments from ECB members. The overnight reaction of USD/JPY also suggests that the topside in this cross rate is rather well protected.

Currencies

R2 1,1428 -1dR1 1,1189EUR/USD 1,1084 -0,0003S1 1,0913S2 1,0822

Still no clear trend in EUR/USD and USD/JPY

EUR/USD hovers near 1.11

USD/JPY: yen holding strong despite risk-on correction

Tion

Asian equity rebound slows

EUR/USD and USD/JPY reverse overnight spike

Eco data might gain more attention

How for does the risk-on rally go?

We don ‘t expect a sustained further rebound of EUR/USD and USD/JPY


P. 6

Since Tuesday, markets staged an impressive post-Brexit risk-rebound as investors grow even more convinced that a prolonged period of easy global monetary conditions is here to stay. This rebound had only a limited impact on the major currencies except for sterling. If anything, it caused some tentative dollar softness. Until now there was no clear post-Brexit driver for EUR/USD and USD/JPY trading. We look how far this risk-on rebound goes. We maintain the working hypothesis that 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. The first aggressive repositioning might be over, but new pockets of uncertainty might pop up. Friday’s intraday top (1.1189) is a first short-term reference. This level might already be a tough resistance. First support comes in at 1.0913 (Friday low) and 1.0822 (March correction low). The context is also intrinsically yen positive, but we have the impression that markets stay reluctant to push USD/JPY aggressively below 100 as they feel uncomfortable with the risk of Japanese (or even coordinated) action.

Sterling declines as Carney signals further easing

EUR/GBP had initially a remarkably calm trading session. The pair held a tight, sideways range roughly between 0.8250 and 0.8300. The headlines on the election process for a new conservative PM also had little impact on sterling trading. Hover, late in the session, sterling came again under pressure as BoE Governor Carney in a television address indicated that a BoE rate cut in the summer is very well possible. UK interest rates declined further. Sterling resumed its downtrend. EUR/GBP tested the post-Brexit top in the 0.8380 area and closed the session at 0.8343 (from 0.8287). Cable dropped to the low 1.32 area but closed the session at 1.3311 (from 1.3429).

Overnight, both EUR/GBP and cable held near yesterday’s closing levels. Cable shows a slightly negative bias. Later today, the UK manufacturing PMI is expected stable at 50.1. We look out whether there is already an impact from the Brexit vote. If so, it might reinforce the case for BoE to ease policy sooner rather than later. This might weigh on sterling. Short-term, sterling likely entered a sell-on-upticks pattern. We don’t anticipate BoE interventions to support sterling. The bank will probably accept this first repositioning and will only step in if the decline of sterling continues in a disorderly way from current ‘reset’ levels. We think that the BoE will primarily address a potential negative impact on growth rather than defend the currency to prevent a temporary spike in inflation. In this context there is no reason to row against the sterling negative tide. We look out whether EUR/GBP can regain the 0.8380/82 resistance.

R2 0,85 -1dR1 0,8382EUR/GBP 0,8343 0,0062S1 0,7794S2 0,7717

EUR/GBP tests post-Brexit top on BOE easing expectations

GBP/USD: sterling weakness persists after initial sell-off


P. 7

Friday, 1 July Consensus Previous US Wards Domestic Vehicle Sales (Jun) 13.35m 13.33m Wards Total Vehicle Sales (Jun) 17.30m 17.37m 15:45 Markit Manufacturing PMI (Jun F) 51.4 51.4 16:00 ISM Manufacturing (Jun) 51.4 51.3 16:00 Construction Spending MoM (May) 0.6% -1.8% Japan 01:30 Jobless Rate (May) A 3.2% 3.2% 01:30 Job-To-Applicant Ratio (May) A 1.36 1.34 01:30 Overall Household Spending YoY (May) A -1.1% -0.4% 01:30 Natl CPI YoY (May) A -0.4% -0.3% 01:30 Natl CPI Ex Fresh Food YoY (May) A -0.5% -0.3% 01:30 Tokyo CPI YoY (Jun)A A -0.5% -0.5% 01:50 Tankan Large Mfg Index/Outlook (2Q) A 6 / 6 6 / 3 01:50 Tankan Large Non-Mfg Index/Outlook (2Q) A 19 / 17 22 /17 04:00 Nikkei Japan PMI Mfg (Jun F) A 48.1 47.8 07:00 Vehicle Sales YoY (Jun) A 3.0% 6.6% 07:00 Natl CPI Ex Fresh Food, Energy YoY (May) A 0.8% 0.9% 07:00 Consumer Confidence Index (Jun) A 41.8 40.9 China 03:00 Manufacturing PMI (Jun) A 50.0 50.1 03:00 Non-manufacturing PMI (Jun) A 53.7 53.1 03:45 Caixin PMI Manufacturing (Jun) A 48.6 49.2 UK 10:30 Markit PMI Manufacturing SA (Jun) 50.1 50.1 10:30 Unit Labor Costs YoY (1Q) -- 1.3% EMU 10:00 Markit Manufacturing PMI (Jun F) 52.6 52.6 11:00 Unemployment Rate (May) 10.1% 10.2% Germany 09:55 Markit/BME Manufacturing PMI (Jun F) 54.4 54.4 France 09:50 Markit Manufacturing PMI (Jun F) 47.9 47.9 Italy Budget Balance (Jun) -- -1.6b 09:45 Markit/ADACI Manufacturing PMI (Jun) 52.4 52.4 10:00 Unemployment Rate (May P) 11.7% 11.7% 18:00 New Car Registrations YoY (Jun) -- 27.29% Belgium 11:00 Unemployment Rate (May) -- 8.7% Norway 09:00 Manufacturing PMI (Jun) 50.5 51.1 10:00 Unemployment Rate (Jun) 3.0% 2.9% Spain 09:15 Markit Manufacturing PMI (Jun) 52.0 51.8 Sweden 08:30 Swedbank/Silf PMI Manufacturing (Jun) 53.8 54.0 Events 09:15 ECB's Coeuré Speaks in Paris 10:30 ECB's Nowotny Presents Austrian Financial Stability Report 17:00 ECB's Weidmann Speaks in Munich 17:00 Fed’s Mester Speaks on Economics and Policy Outlook

Calendar


P. 8

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 1,43 -0,08 US 0,57 -0,06 DOW 17930 17929,99DE -0,09 0,02 DE -0,63 0,02 NASDAQ for Exch - NQI #VALUE!BE 0,23 -0,04 BE -0,56 -0,01 NIKKEI 15682 15682,48UK 0,89 -0,06 UK 0,11 -0,07 DAX 9680,09 9680,09JP -0,25 -0,02 JP -0,34 -0,03 DJ euro-50 2865 2864,74

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,293 0,0443y -0,211 0,782 0,495 Euribor-1 -0,36 0,00 Libor-1 USD 0,51 0,515y -0,114 0,940 0,595 Euribor-3 -0,28 0,00 Libor-3 USD 0,56 0,5610y 0,357 1,305 0,989 Euribor-6 -0,18 0,00 Libor-6 USD 0,68 0,68

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,10845 -0,0005 EUR/JPY 113,79 -0,05 192,574 1332,4 49,85USD/JPY 102,715 0,02 EUR/GBP 0,8339 0,0059 - 1d 1,03 16,25 -0,20GBP/USD 1,3285 -0,0101 EUR/CHF 1,0829 -0,0049AUD/USD 0,7447 0,0024 EUR/SEK 9,3891 -0,02USD/CAD 1,2965 0,0001 EUR/NOK 9,2901 -0,04

Friday, 01 July 2016 - Microsoft · Friday, 01 July 2016 P. 1 . Rates: Bund sold off sharply, while US Treasuries and UK gilts rally . A story based on “sources” triggered a nasty

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