Monday, 12 June 2017

P. 1

Rates: Risk sentiment key, but FOMC can keep investors at bay

Today’s eco calendar is empty. Risk sentiment could be key for trading, especially if European stocks pick up signals from WS. A correction lower is positive for core bonds via safe haven flows, but we don’t expect big moves ahead of Wednesday’s FOMC meeting.

Currencies: Tentative USD rebound slows as tech stocks fall off a cliff

On Friday, the dollar failed to maintain cautious intraday gains as US tech stocks nosedived later in the session. This morning, the euro doesn’t profit from the Macron victory in France. A negative risk sentiment might be negative for USD/JPY, but neutral for EUR/USD as investors look forward to the Fed policy’s decision on Wednesday.

Calendar

• Nasdaq was hard hit on Friday (-1.8%) as heavy profit taking in the hugely

overbought tech universe took place. Other US markets closed little changed. Asian equities are mostly lower (till about 1.2%) with a few positive outsiders.

• En Marche!, the party of president Macron is on track for a sweeping majority in the National Assembly. The party got 31.5% of the votes in the 1st round which should lead to a huge/absolute majority in the 2nd round a.

• UK PM May’s office backtracked on a statement that a deal was reached with the Democratic Unionist Party (N-Ir), adding to a sense of chaos around her government after last week’s disastrous election, and 8 days before Brexit talks.

• PM May could face a leadership challenge as soon as Tuesday if she fails to rally a meeting of her lawmakers that day, while five cabinet ministers are urging Johnson to oust her, the Sunday Times reported.

• Moody’s downgraded South Africa’s rating from Baa2 to Baa3, negative outlook, citing weakening of the institutional framework, reduced growth prospects and continued erosion of fiscal strength. It is now close to junk status, which is already the case at S&P and Fitch.

• The anti-establishment party Five Star Movement was brace for a setback in Italian municipal elections, as it failed to make run-off contests in many cities.

• Today’s eco calendar is empty. Attention goes to the results of the French parliamentary and Italian local elections, UK PM May’s struggle to safeguard her premiership and Friday’s sell-off in Nasdaq.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Monday, 12 June 2017

P. 2

Bonds little changed despite UK election result and Nasdaq mini crash

Friday, despite the surprise UK election result and the increase of concomitant uncertainty, global core bonds hovered directionless in a tight range, closing little changed. Core bonds erased some modest intra-day losses (profit taking as long positions had seriously built up in past weeks) during the US session when the NASDAQ nose-dived (before partially recovering). The NASDAQ correction occurred (maximum decline of 3.2% intra-day) after outsized gains, especially of the big five stocks, in past weeks/months. The broader S&P index also dived lower intra-day, but closed with minimal losses. The bond market may have become a bit too “long” after the past rally or they await the results of this week’s FOMC meeting. Therefore, they ignored typical bond-friendly events. In a daily perspective, US yields were up between 0.5 bp (30-yr) and 1.8 bp (2-5-yr), while German yields were virtually unchanged at the 2-5-yr sector and up 0.7 bp and 2.5 bps at the 10- and 30-yr tenors respectively. On intra-EMU bond markets, 10-yr yield spread changes versus Germany continued to narrow on follow through buying, up to 6 bps (Spain/Greece) with Italy outperforming (-10 bps). Italian BTP’s performed strongly on the positive APP ECB decision and as Italian early election plans look postponed.

Nearly empty calendar today; FOMC Wednesday

The market calendar contains only the French INSEE business sentiment and the Italian production today, none of which will move the market. In the US, the Treasury starts its mid-month financing operation with a $24B 3-yr and a $20B 10-yr Note auctions (see lower). Later on, the US eco calendar is busy with PPI (Tuesday), CPI, retail sales (Wednesday), some regional business sentiment reports and production on Thursday and housing data & Michigan consumer sentiment on Friday. Of course, the week will be dominated by the key June FOMC meeting at which also new forecasts will become available. A rate hike is widely expected, while the Fed may also unveil more details of its balance sheet tapering plan. The Fed rate projections for later this year and next years is another key topic as markets rate expectations fall abnormally short of the Fed’s rate path. The press conference of chairwoman Yellen will be another source of info for markets, especially after the weak inflation data in the past months. Some governors are uneasy after the slowdown of inflation and have said it might affect their future policy intentions. We hope to hear Yellen’s opinion on low inflation and low wages in a context of full employment.

Rates

US yield -1d2 1,34 0,035 1,78 0,0310 2,21 0,0330 2,87 0,02

DE yield -1d2 -0,73 0,015 -0,45 0,0010 0,26 0,0130 1,13 0,02

Small bond losses as UK election results and Nasdaq mini-crash cannot inspire a “long” bond market

Peripherals continue to gain, especially Italy on ECB APP decision (and maybe less risk of early Italian elections)

T-Note future (orange) and Nasdaq (black) (intraday): Bonds largely ignore UK post-election instability & sharp intra-day crash of the

Nasdaq

Fed dots median rate projection (green) & markets rate expectations (bleu): Huge gap suggests market don’t belief the Fed

No market-moving releases

Later this week, interesting US data calendar

Key event: FOMC meeting

Monday, 12 June 2017

P. 3

US supply starts, heavy EMU issuance this week This week’s scheduled EMU bond supply comes from the Netherlands, Italy, Germany, Spain and Italy. The Dutch debt agency starts tomorrow by tapping the on the run 10-yr DSL (0.75% Jul2027) for up to €3B. The Italian Treasury taps the on the run 3-yr BTP (€2-2.5B 0.35% Jun2020) and 7-yr BTP (€2.5-3B 1.85% May2024). On Wednesday, the German Finanzagentur taps the on the run 10-yr Bund (0.25% Feb2027) for €3B. The French Treasury sells two on the run OAT’s (0% Feb2020 & 0% May2022) and two off the run OAT’s (3% Apr2022 & 4.25% Oct2023) for a combined €7-8B. Additionally, they’ll try to raise €1-1.5B via inflation-linked bonds. The Spanish debt agency also issues two on the run and two off the run bonds: 5-yr Bono (0.4% Apr2022), 10-yr Obligacion (1.5% Apr2027) and off the run’s (5.75% Jul2032 & 4.2% Jan2037). The amounts on offer still need to be announced. The US Treasury starts its mid-month refinancing operation today (exceptional timing due to Wednesday’s Fed meeting) with a $24B 3-yr Note auction and a $20B 10-yr Note auction. Currently, the WI’s respectively trade around 1.49% and 2.08%. The Treasury ends its refinancing tomorrow with a $12B 30-yr Bond auction.

Risk sentiment key, but FOMC can keep investors at bay

Overnight, most Asian stock markets lose ground after Friday evening’s sharp correction on the Nasdaq (other main US indices ended flat or even higher (Dow). The US Note future can’t profit from the minor risk aversion and trades flat. We expect a neutral opening for the Bund. French President Macron’s won the 1st round of the French parliamentary election and is expected to gain a landslide in the 2nd round. French OAT’s can profit with a further narrowing of the spread vs Germany.

Today’s eco calendar is empty. Risk sentiment could be key for trading, especially if European stocks pick up signals from WS. A correction lower is positive for core bonds via safe haven flows, but we don’t expect big moves ahead of Wednesday’s FOMC meeting. A 25 bps rate hike is discounted, but markets will be eager to know the central bank’s intentions in H2 2017 (additional hike(s), run-off BS). Trading will probably be confined to existing ranges today.

US yields intensively tested key support last week on the US 5-yr (1.69%), 10-yr (2.17%) and 30-yr (2.82%) tenors, but a break didn’t occur. This technical bottoming out signal could be confirmed by the fundamental’s (Fed) on Wednesday.

R2 166,40 -1dR1 165,93BUND 164,94 -0,21S1 161,68S2 160,17

German Bund (September contract!!): ECB holds off policy normalization, but Bund can’t really profit

US Note future (September contract!!!): US 10-yr yield failed to break below 2.16% last week. Technical sign confirmed by Fed on

Wednesday.

Monday, 12 June 2017

P. 4

EUR/USD: Off the recent highs, but no follow-through losses

USD/JPY: rebound aborted as tech stocks fall prey to profit

taking.

Dollar rebound slows at Tech stocks tumble

On Friday, the swings in the major cross rates, excluding sterling, were modest. In a session deprived of important eco data, the dollar initially continued Thursday’s gradual comeback. At the same time, Thursday’s cautious ECB approach capped the topside of the euro. Later in the session, the dollar returned most of the intra-day gains, partially driven by a correction of US Tech stocks. EUR/USD closed the session at 1.1195. USD/JPY touched an intraday top in the 110.81 area, but closed the day at 110.32.

Overnight, there is little high profile economic news. Most Asian equity markets are feeling some fall-out from the tech correction in the US on Friday. For now, the impact on the major FX cross rates is modest. USD/JPY hovers sideways in the lower half of the 110 big figure. In France, Macron succeeded a major victory in the first round of the French parliamentary elections and will secure a comfortable majority in the second round. At least on the Asian markets, the French election doesn’t support further euro gains. EUR/USD stabilises in the 1.1210 area.

There are no eco releases of interest. The political after-shocks from the UK election probably also won’t be important for the major euro and USD cross rates. The convincing Macron victory is/was a potential positive for French/European equities and for the euro. However, in Asia the focus is on the US tech correction and this might also be the case at the European opening. Investors will also look forward to the FOMC meeting (Wedn). At the end of last week, the dollar started a bottoming out process as event risks (Comey, UK election, ECB) were out of the way, but the USD momentum petered out late on Friday. More technical trading ahead of the Fed policy decision is likely. If the Tech correction would continue or spread to other markets, USD/JPY remains most vulnerable. The picture for EUR/USD is neutral going into the Fed policy decision. We still favour the view that further EUR/USD gains will be difficult if sentiment on risk turns outright negative (negative pressure from EUR/JPY).

Currencies

R2 1,1428 -1dR1 1,13EUR/USD 1,1212 0,0009S1 1,0839S2 1,0778

Soft Draghi comments cap EUR/USD topside

Dollar fails the extend recent bottoming process/rebound

French election result no impact in Asian trading.

No important eco data

Dollar off the recent lows.

Tech correction remains a wildcard

Monday, 12 June 2017

P. 5

Technical picture

The USD/JPY rally ran into resistance in early May. A mini sell-off pushed the pair below the previous top (112.20), making the short-term picture negative. The post-payrolls USD sell-off below 110 deteriorated the picture further. The pair declined further in the 108.13/114.37 range. At the end of last week the USD/JPY decline slowed, but there is no convincing sign of a U-turn yet.

Earlier in May, EUR/USD failed to break below the 1.0821/1.0778 support (gap). Poor US data and US political upheaval propelled EUR/USD north of the 1.1023 range top. The pair initially reached a short-term correction top at 1.1268. There was a minor break after disappointing US payrolls, but no sustained follow-through gains occurred. The Trump top/correction top at 1.1300/1.1366 is next resistance. USD sentiment will have to be quite negative to clear this hurdle short-term. A return below 1.1023 would indicate that the upside momentum has eased.

Sterling sell-off slows, but uncertainty continues to weigh

On Friday morning, investors adapted positions as UK PM May’s conservative party lost its majority in Parliament. Sterling selling started in Asia as soon as it became clear that the UK was heading for a hung Parliament and reaccelerated early in Europe. EUR/GBP tested the 2017 top in the 0.8855 area. However, no sustained break occurred. On the contrary, the UK currency gradually found its composure and rebounded. Markets pondered whether the new political context could lead to a softer Brexit. Such a scenario could be less negative for sterling. The jury is still out on this issue as UK PM May wants to join forces with the Northern Ireland’s DUP. EUR/GBP closed the session at 0.8682. Cable finished the week at 1.2746.

There are a gain no important eco data in the UK today. The focus will be on the political scene. Today and tomorrow May will face plenty political opposition in her own conservative party. It’s unsure if this will lead to a resignation of May in the very short-term, but the pressure will remain. At the same time, there is a lot of speculation whether the new political context will lead to a softer Brexit. In theory this might be supportive/less negative for sterling, but it’s too early to play this card already. For now we assume that political risk will prevail and that there is no trigger for a sustained sterling rebound yet.

From a technical point of view, EUR/GBP broke above the 0.8774 resistance and tested the 0.8854 area(2017 top) on Friday. A real break didn’t occur. A retest of that area is possible. A break beyond would open the way to the 0.90 area. A return below the 0.8655 correction low would be an indication that the pressure on, sterling is easing.

R2 0,8881 -1dR1 0,8854EUR/GBP 0,8783 -0,0039S1 0,8383S2 0,8314

EUR/GBP: first test of 2017 top rejected, but sterling remains in the defensive

GBP/USD: topside test rejected on UK election outcome. More losses on USD decline

Monday, 12 June 2017

P. 6

Monday, 12 June Consensus Previous Japan 01:50 PPI MoM / YoY (May) A 0%/2.1% 0.2%/2.1% 01:50 Machine orders M/M Y/Y (Apr) A-3.1%/2.7% 1.4%/-0.7% China 09JUN-18JUN Foreign Direct Investment YoY CNY (May) -- -4.3% 10JUN-15JUN Money Supply M0 YoY (May) 6.0% 6.2% France 08:30 Bank of France Bus. Sentiment (May) 105 104 Italy 10:00 Industrial Production MoM / WDA YoY (Apr) 0.2%/2.5% 0.4%/2.8% Events 17:30 US to Sell $24B 3-yr Notes 19:00 US to Sell $20B 10-yr Notes

10-year td -1d 2-year td -1d Stocks td -1dUS 2,21 0,03 US 1,34 0,03 DOW 21271,97 89,44DE 0,26 0,01 DE -0,73 0,01 NASDAQ 6207,918 -113,85BE 0,61 0,02 BE -0,57 0,02 NIKKEI 19908,58 -104,68UK 1,01 -0,03 UK 0,09 -0,03 DAX 12815,72 102,14

JP 0,06 0,00 JP -0,10 0,01 DJ euro-50 3586,07 22,19

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,10 1,67 0,54 Eonia -0,3600 -0,00205y 0,14 1,86 0,70 Euribor-1 -0,3740 0,0000 Libor-1 1,1271 0,031110y 0,75 2,17 1,09 Euribor-3 -0,3310 -0,0010 Libor-3 1,2364 0,0154

Euribor-6 -0,2640 -0,0040 Libor-6 1,4168 0,0028

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

EUR/USD 1,1212 0,0009 EUR/JPY 123,57 0,10 CRB 176,76 0,67USD/JPY 110,21 0,00 EUR/GBP 0,8783 -0,0039 Gold 1268,80 -8,00GBP/USD 1,2766 0,0067 EUR/CHF 1,0863 0,0014 Brent 48,40 0,55AUD/USD 0,7531 -0,0003 EUR/SEK 9,7598 -0,0084USD/CAD 1,3444 -0,0072 EUR/NOK 9,489 -0,0310

Calendar

Monday, 12 June 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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