Monday, 04 July 2016

P. 1

Rates: US Treasury 10- and 30-year yields test lows

Riskier assets and safe haven asset both advanced last week, as central bankers suggested they would come to the rescue. Today, the US markets are closed and the calendar is unattractive, suggesting quiet trading. The fate of Italian banking sector is a wild card. Later on, as riskier assets have recouped post-Brexit losses, the question is whether the rally can continue

Currencies: major dollar cross rates captured in tight ranges

Dollar softness persists as markets anticipate global easy monetary conditions for long. However, USD./JPY and EUR/USD are still confined to tight post-Brexit ranges. This pattern might continue today as US markets are closed. EUR/GBP tests the 0.84 big figure as the BoE is expected to take further easing steps to protect the economy post-Brexit.

Calendar

• US Equities reversed most of their gains on Friday, ending only slightly higher,

despite a strong manufacturing ISM. This morning, Asian shares extend their rebound with Chinese ones outperforming.

• UK Chancellor of the Exchequer Osborne is planning to slash the corporation tax to less than 15% in an effort to keep businesses investing in the UK as part of a new five-point plant to galvanise the economy.

• Italian Prime Minister Renzi is determined to intervene with public funds if the banking sector comes under severe systemic stress, despite warnings from Brussels and Berlin over the need to respect rules that make creditors rather than tax payers fund bank rescues.

• The outcome of Australia’s Federal elections is still unclear with counting expected to take several days. Prime Minister Malcolm Turnbull’s conservative Liberal-National coalition hasn’t gained enough seats in parliament to form a government and neither has the centre-left Labor opposition. The Aussie dollar holds up well, despite warnings it might lose its AAA-rating.

• Silver continues to profit from save haven demand. This morning, silver rose for a fifth straight session, jumping temporary above $21/ounce, for the first time in almost two years. Since Brexit, silver has gained almost 20%. Gold extended its rebound too, rising above $1350/ounce.

• Fitch Ratings affirmed Belgium’s AA rating with a negative outlook saying the negative outlook reflected a further slippage in the government’s deficit reduction plans, leading to a slower debt reduction trajectory.

• Today, the eco calendar is thin with only the UK construction PMI. US Markets are closed in observance of Independence Day.

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, 04 July 2016

P. 2

Core bonds, equities, commodities & peripherals rise!!

On Friday, safe haven global bonds, yen, gold did well, but so did riskier assets like equities, commodities and peripherals. Signs that central banks will go even easier on monetary policy is the single driver that offsets the post-Brexit flight into safety registered in the immediate aftermath of the Brexit decision. The US 30-year yield hit its lowest level since the 50s at 2.19%, while the 10-year yield tested the 2012 lows with a minor new low at 1.378%. Some profit taking occurred afterwards. So, these major technical supports aren’t broken yet. The Bloomberg “sources” story of Thursday eve about the ECB looking to adapt the capital key framework (meaning buying bonds in relation to the pile of debt instead of the seize of the economy) was according to Reuters ECB “sources” denied. The German Bund recouped the 150 ticks loss in early dealings, but moved sideways afterwards, as traders and investors digested the shocking decline. Maybe more important ECB Praet, close to chairman Draghi, didn’t want to answer on the capital key issue. He though didn’t flatly rebuffed the idea as rubbish, which suggests that some kind of changes are under consideration if not the one first suggested (buying below -0.4% depo-rate; raising maximum limit on non-CAC bonds to 50%, buying more agency debt like German Länder, or others are more likely solutions…). So, another bond (and other assets) positive. We saw all-time lows for French, Dutch, Austrian and Belgian 10-year yields.

In a daily perspective, the US Treasury curve flattened sharply with yields up 0.8 bp at the 2-year, but up to 5.9 bps lower (30-yr) further out the curve. German yields more or less stabilized with changes varying from 0.4 bps (10-yr) to 1.6 bps (30-yr) higher. In the UK, the curve flattened but via higher short term yields (6-to-3.8 bps higher on the 2-5 sector- and lower long term yields (-0.4 to 2 bps). On peripheral and semi-core markets, 10-yr yield spreads versus Germany narrowed moderately by 3 to 6 bps (Portugal/Italy/ Belgium/France) with Ireland (-6 bps) and especially Greece (-42 bps) outperforming. Interestingly, also swap rates declined substantially and the curve flattened with rates down by 1.6 bps (2-yr) to 8.1 bps (15-yr). The sharp 8 bps narrowing of the 10-year Bund-swap was surprising and raises questions.

Today, US markets are closed in observance of Independence Day. In Europe, the eco calendar is also thin (only May PPI). The ECB will only announce the amount of assets purchased. Later this week, there will be some interest for the final EMU Services PMI (Tuesday), German orders & production (Wednesday-Thursday) and French production (Friday). However, these data concern the

Rates

US yield -1d2 0,5973 0,02385 1,0042 0,033610 1,456 0,027130 2,2406 0,0112

DE yield -1d2 -0,6530 -0,02505 -0,5610 -0,026010 -0,1171 -0,031430 0,4153 -0,0351

Bund (intra-day, 2 days)): Thursday’s eve crash undone in early session followed by sideways trading (digesting these violent moves)

US 30-year yield drops to new low (since the 50s) in a test of the 2012 low (yield support), but cannot sustain below for now.

All assets higher as more central bank easing is expected

US 10 and 30-year yields set new lows

Peripheral spreads narrow and most semi-core yields at new historic lows.

Gold sharply up and yen somewhat stronger

Monday, 04 July 2016

P. 3

pre-Brexit era and thus will likely be ignored. More attention will go to ECB speakers and the ECB Minutes (Thursday). Speakers will be active throughout the week, but all in all it is unlikely we will get some concrete signs about policy. During the weekend, ECB Weidmann, admittedly a hawk, said there is no need for further easing in response to Brexit. ECB Nowotny favours timely signals on whether QE will be extended, but it is too early to offer detailed perspectives. The ECB seems to have taken a wait-and-see attitude on the question where the euro clearing should be done. ECB Coeuré and Villeroy said it depends on future relationship between EU and UK. So, it might be used as a bargain chip. It differs from the comments by French and German politicians that the clearing couldn’t stay in the UK after Brexit. During the week there may again be some rumours about the possible future ECB actions though. In the US, the focus will be mainly on the June payrolls (Friday) and the FOMC Minutes (Wednesday).

Quiet trading with US markets are closed and empty calendar

Overnight, Asian equities started the week positively with moderate (Japan and most other bourses) to strong gains (China). Australia under-performs with marginal gains as the elections were inconclusive and a coalition government is unlikely. There is little other event news and no eco releases of interest. Sentiment is risk-on as also commodities are well bid. Oil is little changed above $50/barrel. However also gold and silver advance. JGBs are little changed. So overall risk-on sentiment, but with no negative repercussions on safe havens. The T-Note future is little changed which may lead to a neutral opening of the Bund.

Today, the US markets are close for Independence Day. The EMU calendar contains is unattractive. In the wake of the Brexit-vote markets are looking for a new equilibrium. Central banks suggested that more accommodation might be forthcoming. As a result, riskier assets did well, as did core bonds and other safe havens. US Equities have now recouped post-Brexit losses and so is e.g. oil. Peripheral spreads have retraced more or less the initial widening, while semi-core spreads are narrower than before. Central banks opened the liquidity spigot or at least markets are hoping they’ll do it. German bonds are at new lows across the curve, while US ones are testing the lows (10-30-year). The downside in core bonds is still well protected and some advance is still possible, but as they are already expensive further gains may be more difficult. It probably depends on equities. US equities are near the highs, but a break above would surprise us as there are lots of uncertainties still ahead. Nevertheless, we stay open minded and watch closely how markets evolve from current positions. For today, we expect technical-driven sideways trading.

R2 170 -1dR1 168,86BUND 166,86 0,4600S1 165,68S2 163,61

German Bund: nasty sell-off on Tuesday washed away. Keeps Bund well bid in the face of rally riskier assets.

US Note future: tried to reach the post-Brexit highs, but hurdle was too high. Nevertless still at higher post-Brexit levels, even as US

equities have erased Brexit losses and are new highs.

US

Monday, 04 July 2016

P. 4

Dollar slightly in the defensive as risk-on contiues

On Friday, the global risk-on trade continued unabated driven by hopes on a prolonged period of ultra-loose monetary conditions. This causes some overall USD softness. The intraday decline of the dollar slowed after a stronger than expected US manufacturing ISM. Later in the session, the US equity rally did run into resistance going into a long weekend (Fourth of July). EUR/USD closed the session at 1.1136 (from 1.1106). USD/JPY finished at 102.52 (from 103.20).

This morning, the equity and commodity rally continues in Asia. China outperforms, as does silver, nearing 2-year highs. The yuan touched the lowest level against the dollar in 5 ½ year, even as the PBOC fixed the yuan slightly stronger against the dollar. As was often the case last week, the impact on the major dollar cross rates remain modest. The yen is declining slightly with USD/JPY rebounding to the 102.75 area. EUR/USD is little changed from Friday’s close, trading in the 1.1135 area. The Aussie dollar dropped to AUD/USD 0.7440 as the outcome of the Parliamentary elections was indecisive, raising chances for a minority government. However, the Aussie dollar rebounded north of AUD/USD 0.75 due to the overall risk-on rally.

Today, US markets are closed in observance of Independence Day and the market calendar unattractive (see last page). Later this week, there are quite some data on the agenda, but these concern the pre-Brexit era. So, markets might give little attention. The US June payrolls (Friday) probably won’t be ignored and the FOMC Minutes (Wednesday) might also be interesting. More attention will go to ECB speakers as markets look for clues on a potential change in the technicals of the ECB QE programme. An indication of less tight QE rules might be slightly negative for the euro.

Since last Tuesday, 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 now, there was no clear post-Brexit driver for EUR/USD and USD/JPY trading. We look how far this risk-on rebound goes.

Currencies

R2 1,1428 -1dR1 1,1189EUR/USD 1,1136 0,0052S1 1,0913S2 1,0822

No clear trend in EUR/USD and USD/JPY

EUR/USD nearing the 1.1189 resistance

USD/JPY: going nowhere despite risk-on correction

Tion

Asian equities extend rebound

Commodities holding strong

Aud rebounds further despite inconclusive election result

Monday, 04 July 2016

P. 5

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. The post-Brexit 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.

EUR/GBP tests 0.84 barrier

On Thursday evening, sterling recorded substantial losses against the euro and the dollar as BoE governor Carney pre-committed a rate cut in the near future. EUR/GBP tested the post-Brexit high in the 0.8380 area. There was a modest sterling rebound Friday morning and the UK manufacturing PMI was stronger than expected. However, the survey results pre-dated-Brexit era. So, it was not really issue for sterling trading. Expectations for further BoE easing kept sterling in the defensive. There was also market talk that the BoE is considering to cut UK banks’ cyclical capital buffer, which would also be a form of monetary easing. EUR/GBP set a minor new correction top north of 0.84 and closed the session at 0.8387. Overall dollar softness prevented cable returning to the post-Brexit lows, but the longer term picture of the cross rate remains fragile. GBP/USD closed the session at 1.3267.

During the weekend, UK Fin Min Osborne launched a series of measures to support the UK post-Brexit economy, including a corporate tax rate cut closer to 15%. Fiscal stimulus is in theory supportive for the currency. Sterling trades slightly stronger against the euro and the dollar this morning. However, we don’t anticipate that the Osborne ideas will be enough to reverse the sterling decline. The BoE will also do its part of the job with outright monetary easing and probably also some relief on the cyclical capitals buffers. This remains intrinsically negative for sterling. Today, only the UK construction PMI will be published. A weaker than expected figure (50.2) might be slightly negative for sterling. Short-term, sterling likely entered a sell-on-upticks pattern. The BOE will probably accept the decline of sterling. We think that the BoE will primarily address a potential negative impact on growth rather than defend the currency. In this context there is no reason to row against the sterling negative tide. Short-term we look out whether EUR/GBP can regain the 0.8380/82 resistance in a sustainable way.

R2 0,85 -1dR1 0,8406EUR/GBP 0,8377 0,0034S1 0,7794S2 0,7717

Eco calendar is thin today

How for does the risk-on rally go?

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

CB comments are a wildcard

EUR/GBP tests post-Brexit top

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

Monday, 04 July 2016

P. 6

Monday, 4 July Consensus Previous Canada 15:30 RBC Manufacturing PMI (Jun) -- 52.1 16:30 Business Outlook Future Sales (2Q) -- 16.00 16:30 BoC Senior Loan Officer Survey (2Q) -- 6.6 Japan 01:50 Monetary Base YoY (Jun) A 25.4% 25.5% 01:50 Monetary Base End of period (Jun) A ¥403.9 ¥386.7t UK 10:30 Markit/CIPS UK Construction PMI (Jun) 50.7 51.2 EMU 11:00 PPI MoM YoY (May) 0.3% / -4.1% -0.3%/ -4.4% Spain 09:00 Unemployment MoM Net ('000s) (Jun) -100.0 -119.8 Events US Markets are Closed in Observance of Independence Day 15:45 ECB Publishes Weekly QE Details

Calendar

Monday, 04 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 1,46 0,03 US 0,60 0,02 DOW 17949 17949,37DE -0,12 -0,03 DE -0,65 -0,02 NASDAQ for Exch - NQI #VALUE!BE 0,21 -0,02 BE -0,58 -0,03 NIKKEI 15776 15775,80UK 0,86 -0,02 UK 0,14 0,03 DAX 9776,12 9776,12JP -0,25 0,00 JP -0,34 0,00 DJ euro-50 2883 2883,06

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,321 -0,0283y -0,218 0,822 0,508 Euribor-1 -0,36 0,00 Libor-1 USD 0,49 0,495y -0,126 0,973 0,600 Euribor-3 -0,29 0,00 Libor-3 USD 0,52 0,5210y 0,345 1,330 0,966 Euribor-6 -0,18 0,00 Libor-6 USD 0,63 0,63

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,1133 0,0049 EUR/JPY 114,24 0,41 194,2599 1351,04 50,72USD/JPY 102,63 -0,09 EUR/GBP 0,8378 0,0037 - 1d 1,69 18,64 0,87GBP/USD 1,3285 0,0003 EUR/CHF 1,0839 0,0011AUD/USD 0,7506 0,0058 EUR/SEK 9,3926 0,00USD/CAD 1,2878 -0,0084 EUR/NOK 9,2793 -0,01