Friday, 20 May 2016

P. 1

Rates: More repositioning or fear of equity correction?

US Treasuries didn’t lose more ground during US dealings despite hawkish comments from influential NY Fed governor Dudley and an oil price recovery. That’s somewhat disappointing given all the clear hints from the Fed that a Summer rate hike is probable. Perhaps bond investors keep a close eye at the fragile equity picture as well…

Currencies: Dollar stabilizes after post Minutes’ rebound

The dollar couldn’t build out Wednesday’s gains even as Fed’s Dudley supported the case for a Summer rate hike. Today, the eco calendar is thin. USD traders will keep an eye at the G7 meeting. Sterling profited from much stronger than expected retail sales. EUR/GBP tests a second support in the 0.7650 area.

Calendar

The outlook for Fed action in the Summer continued to weigh on equity

sentiment yesterday with US stocks ending 0.5% lower. This morning, sentiment improves in Asia with most indices trading in positive territory. Chinese stocks underperform; trading slightly lower.

• “We are on track to satisfy a lot of the conditions for a rate increase”, Fed’s Dudley said yesterday, adding that the June-July time frame is a reasonable expectation, but a key factor for biding time was the potential for market turmoil around Britain’s referendum.

• Crude oil prices reversed their losses yesterday to end the session slightly higher supported by continued supply disruptions and increasing demand for gasoline. The Brent crude oil price trades currently around $49.20/barrel, while the WTI hovers around $48.70/barrel.

• The IMF called on European creditors to provide “very concessional loan terms” which could include long extensions of bond maturities and capped low interest rates to ensure the country’s 180% debt can eventually become sustainable.

• The Bank of England may need to restart its monetary stimulus if the recent slowdown in growth is not primarily due to jitters about the referendum, BoE’s Vlieghe said in a speech, adding that the BoE will be able to gauge the reaction of the British economy to the referendum outcome by the time of the August forecasts.

• Today, the eco calendar is thin with only the US existing home sales and UK CBI industrial trends survey. Fed’s Tarullo and several ECB members are scheduled to speak while there’s also an IMF Seminar. G7 Finance Ministers and central bankers meet in Japan.

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

Friday, 20 May 2016

P. 2

Weakening risk sentiment slightly supportive for bonds

Yesterday, global core bonds traded listless following Wednesday’s severe losses after the hawkish FOMC Minutes. Fed governor Dudley, an influential FOMC member, joined his colleagues in suggesting that the Fed may raise rates in June or July and rejoiced the recent market moves that have raised the probability of a rate hike in the next months. There was one noticeable intra-day move (modestly higher) in both the Bund and the US Note future in early US dealings when the risk sentiment on stock markets deteriorated. A spike higher of oil was totally shrugged off. In a daily perspective, changes on the German yield curve range were minimal between +0.2 bps (10-yr) and --0.7 bps (30-yr). Changes on the US yield curve were barely bigger and ranged between -1 bp and -1.8 bps. The rate probabilities ended little changed: slightly lower for June (28% from 32%), unchanged for July (47%) and slightly higher for September (61% from 58.4%). On intra-EMU bond markets, 10-yr yield spreads versus Germany were basically unchanged.

Economic data and Fed speakers couldn’t startle markets. The EMU eco calendar was empty while US eco data, claims and Philly Fed survey (slightly weaker than expected) were ignored. Richmond Fed Lacker, non-voting hawk, believes that there is a very strong case to hike rates in June. He’s prepared to hike rates 4 times this year. Influential NY Fed governor Dudley sided with his colleagues and the FOMC Minutes, suggesting that a June/July rate hike is likely if data perform well. However, bond bears should be disappointed that US Treasuries didn’t drop anymore, also as oil prices climbed higher. Is the fear for an equity setback stronger?

Unattractive calendar

Today, the eco calendar is almost empty with only the existing home sales on the agenda. Fed’s Tarullo is scheduled to speak and several ECB members will take the stage at an IMF seminar. In April, US existing home sales are expected to have increased for a second straight month, although at a somewhat slower pace than in March. The consensus is looking for a 1.3% M/M rise to 5.40 million, but we believe that an upward surprise is not excluded. Inventories have increased slightly recently and also the pending home sales suggest that a stronger outcome is not excluded. Finally also favourable weather conditions might have supported sales.

Rates

US yield -1d2 0,8798 -0,02855 1,3651 -0,047610 1,8384 -0,043430 2,6317 -0,0472

DE yield -1d2 -0,5030 0,00405 -0,3480 0,008010 0,1730 -0,026030 0,8845 -0,0130

T-Note future (black) & S&P future (orange) (intraday): Treasuries up when equities went down, but no reaction on Dudley, neither on

higher oil prices

US 2 yr yield went somewhat higher in recent days, but still disappointing for the bond vigilantes. If double bottom formation is

confirmed (0.87%), the 2-yr may go for a retest of the highs.

US-Germa

Calm session ends with small daily changes

(Hawkish) NY Dudley doesn’t get US Treasuries lower despite higher oil prices

No changes in intra-EMU markets

Friday, 20 May 2016

P. 3

More repositioning ahead or fear of stock market?

R2 165 -1dR1 164,6BUND 163,62 0,5200S1 161,46S2 160,81

Overnight, most Asian equity markets eke out modest gains amid an empty Asian eco calendar. The US Note future is tad higher despite hawkish comments by influential NY Fed governor Dudley and the recovery of the oil price during US dealings yesterday ($47.50/barrel to >$49/barrel). We expect a neutral opening for the Bund.

Today’s eco calendar is empty apart from second tier US existing home sales. Bond markets will be able to digest this week’s hawkish developments. However, it’s striking that the repositioning (core bonds lower) didn’t go further than it already went. Perhaps investors also keep a close eye at the fragile technical pictures of equity markets. Another sell-off in stocks could protect the downside of bonds today. Technical elements play a role as well with both the US 2-yr yield and 5-yr yield currently testing important resistance levels (neckline double bottoms respectively at 0.87% and 1.4%).

Longer term, the Bund remains in the sideways channel between 160.81 and 164.60. In yield terms, 0.07% is key support for the German 10-yr yield. The US Note future trades in a similar range between 128-01+ and 131-14. We would sell on upticks near the resistances for a move back deeper in the range.

German Bund (160.81 to 164.60): New sell-on-upticks around the upper bound

US Note future: Headling towards 128-01+ on hawkish Fed

US-G

Friday, 20 May 2016

P. 4

Post-FOMC minutes’ USD rally slows

On Thursday, the dollar kept most of Wednesday’s post Fed minutes gains as markets reacted to Fed suggestions about a Summer rate increase. However, the dollar failed to make further headway even as Fed’s Dudley, an influential FOMC dove, supported the case of a Summer rate hike. EUR/USD hovered in a tight range around 1.12 and closed the session at 1.1203, little changed from Wednesday (1.1216). USD/JPY lost a few ticks off the recent highs as equities traded with a negative bias. It closed the session at 109.96 (from 110.19).

Overnight, Asian equities found their composure as the fear for the negative impact of a US rate hike faded and commodities rebounded. Oil trades again north of $49 p/b. Asian equity gains remain modest though (0.5% to 1.0%). The constructive risk sentiment put a floor for USD/JPY, that hovers near 110. The Aussie dollar is trading off yesterday’s correction low below 0.72, but the rebound is tepid (AUD/USD trades in the 0.7230 area). EUR/USD shows again no clear direction, as it is locked in a tight range close to 1.12.

Today, the eco calendar almost empty with only the US existing home sales on the agenda. Fed’s Tarullo is scheduled to speak and several ECB members will take the stage at an IMF seminar. In April, US existing home sales are expected to have increased for a second straight month. The consensus is looking for a 1.3% M/M rise, but we believe that an upward surprise is possible. Currency markets will keep an eye at the global markets reaction in the wake of the recent Fed communication and at today’s star of the G7 meeting. Regarding the latter, US Treasury Secretary Jack Lew and Japanese Finance Minister Aso will hold a bilateral meeting on Saturday. Currencies will likely be on the agenda. However, after the stronger than expected Japan Q1 GDP and given the recent rebound of USD/JPY, the case for currency interventions has vanished. Yesterday’s post-Minutes’ consolidation of the USD and the absence of a reaction the comments of Fed’s Dudley suggests that EUR/USD and USD/JPY have found a new short-term equilibrium, awaiting more evidence from the eco data or from the Fed (Yellen speeches before the June meeting). So, we expected some end of week consolidation after the recent USD rebound;

Currencies

R2 1,1616 -1dR1 1,1447EUR/USD 1,1212 0,0002S1 1,1144S2 1,1058

EUR/USD: post-Fed decline to slow?

USD/JPY settles in the 110 area

Tion

Dollar preserves post-Fed gains, but for now the rally slows.

Today, the calendar is thin

USD traders will keep an eye at global markets’ developments and at the comments from the G7 meeting.

Friday, 20 May 2016

P. 5

Technically, EUR/USD broke temporary above the 1.1495 MT range top on broad-based USD weakness two weeks ago. However, the USD decline petered out despite mixed US eco data. The dollar was gradually supported by less soft Fed speak, keeping the door open for a June rate hike . Wednesday’s minutes gave the dollar additional interest rate support. We maintain our view that the US economy is strong enough to allow the Fed to implement two rate hikes later this year. If the eco data raise the chance for a June rate hike, the dollar might stay well supported short-term. EUR/USD currently dropped below a first support area at 1.1217. However, follow-through losses are very modest. Overall USD weakness and the inability of the BOJ to stop the rise of the yen pushed USD/JPY to new lows two weeks ago. Verbal Japanese interventions to stop the rise of the yen and a rebound of the dollar blocked the downside of USD/JPY. The USD/JPY cross rate held up fairly well of late and was further supported by the Fed Minutes. The USD/JPY rebound is mainly USD-driven. How far has it to go? The high 111 area is a first important resistance. A rise in USD/JPY might run into resistance if global risk sentiment would worsen (due to higher US rates or other event risk).

Sterling gains slightly further on strong retail sales

Earlier this week, sterling rebounded sharply as several polls showed a favourable outcome for the “remain” camp at the June 23 EU referendum. Of late, UK eco data were mostly of second tier importance for sterling trading. However, yesterday’s April retail sales did beat the consensus by an impressive margin (1.5% M/M) and the figure of the previous month was also upwardly revised. Sterling traders couldn’t ignore the big positive surprise in this important series. Sterling rebounded further against the euro and the dollar, but the amount of the gains was more moderate than after Wednesday’s ‘pro-“Remain”stay’ polls. EUR/GBP extensively tested the 0.7652 support, but a sustained break didn’t occur. The pair closed the session at 0.7667 (from 0.7683). Cable finished the day at 1.4611 (from 1.4599).

Today, the CBI Industrial trends total orders will be published. The series is interesting but the reaction of sterling to it is often limited. So, the focus for sterling trading will be on global developments and on Brexit related headlines. As is the case for the USD rally, we see room for some end of week consolidation after the recent sterling rally. Of late, the sterling negative momentum eased after the pair set a top north of 0.81. A counter move occurred last month but a first sterling rebound petered out. Weakening UK eco data and uncertainty on the referendum weighed on sterling. Over the previous days, markets adapted positions to a lower probability of a Brexit. EUR/GBP dropped below a first range bottom at 0.7735. A confirmation of this break would call off the short-term sterling negative momentum and make the picture neutral again.

R2 0,8117 -1dR1 0,7947EUR/GBP 0,7676 -0,0014S1 0,765S2 0,7526

EUR/GBP tests second support at the 0.7650 area

GBP/USD: sterling trending higher in the range

Friday, 20 May 2016

P. 6

Friday, 20 May Consensus Previous US 16:00 Existing Home Sales Total/MoM (Apr) 5.40m/1.3% 5.33m/5.1% Canada 14:30 Retail Sales MoM (Mar) -0.6% 0.4% 14:30 Retail Sales Ex Auto MoM (Mar) -0.4% 0.2% 14:30 CPI NSA MoM YoY (Apr) 0.3% / 1.7% 0.6% / 1.3% 14:30 CPI Core MoM YoY (Apr) 0.2% / 2.0% 0.7% / 2.1% Japan 07:00 Nationwide Dept Sales YoY (Apr) A -3.8% -2.9% 07:00 Tokyo Dept Store Sales YoY (Apr) A -1.5% -1.1% 09:00 Convenience Store Sales YoY (Apr) -- -0.1% UK 12:00 CBI Industrial Trends Survey -Total Orders (May) -13 -11 Germany 08:00 PPI MoM YoY (Apr) A0.1%/-3.1% 0.0% / -3.1% Italy 10:30 Current Account Balance (Mar) -- 1377m Belgium 15:00 Consumer Confidence Index (May) -- -8 Spain 10:00 Trade Balance (Mar) -- -1761.0m Events 19-20/May Several ECB members Speak at IMF Seminar on Rethinking Monetary – Fiscal

Policy Coordination

20-21/May G7 Finance Ministers and Central Bankers meet in Sendai, Japan 15:00 Fed’s Tarullo Speaks in Washington Sweden IL Bond Auction (SEK1.992B 0.5% Jun2017 & SEK2B 0.125% Jun2019)

Calendar

Friday, 20 May 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 1,84 -0,05 US 0,88 -0,03 DOW 17435 17435,40DE 0,17 -0,03 DE -0,50 0,00 NASDAQ for Exch - NQI #VALUE!BE 0,56 -0,03 BE -0,46 0,00 NIKKEI 16753 16752,78UK 1,44 0,00 UK 0,41 0,00 DAX 9795,89 9795,89JP -0,10 -0,03 JP -0,24 -0,02 DJ euro-50 2919 2919,22

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,34 -0,0033y -0,115 1,116 0,890 Euribor-1 -0,35 0,00 Libor-1 USD 0,52 0,525y 0,028 1,302 1,048 Euribor-3 -0,26 0,00 Libor-3 USD 0,59 0,5910y 0,565 1,673 1,459 Euribor-6 -0,14 0,00 Libor-6 USD 0,74 0,74

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,1212 0,0001 EUR/JPY 123,44 -0,23 185,3985 1253,96 49,16USD/JPY 110,12 -0,21 EUR/GBP 0,7677 -0,0014 - 1d -0,46 0,95 1,10GBP/USD 1,4601 0,0031 EUR/CHF 1,1109 0,0031AUD/USD 0,7237 0,0046 EUR/SEK 9,3516 -0,01USD/CAD 1,3078 -0,0002 EUR/NOK 9,3544 0,01