Tuesday, 05 July 2016

P. 1

Rates: German bonds eke out modest gains in lackluster trading

The risk-on sentiment faded in the past 24 hours, giving some modest support to the traditional safe havens. German bond gains were limited, but so was the widening of peripheral spreads. We see little on the agenda that may dominate trading, but are eager to see how US equities react to the recent correction on European and Asian markets, as it might affect bonds.

Currencies: Sterling near the recent lows ahead of Carney’s press conference

EUR/USD and USD/JPY trade slightly softer as the risk-on rally is running into resistance . However, there is probably no news important enough to push both cross rates out of the established ranges. Sterling trades near the recent lows against the euro. Sterling might lose further ground if Carney gives concrete hints on further easing.

Calendar

• US Equities were closed yesterday. In Europe, sentiment weakened throughout

the session. This morning, sentiment in Asia weakens too with most indices trading lower. Chinese markets outperform on a stronger services PMI and expectations that the PBOC will keep its monetary policy loose.

• The Reserve Bank of Australia left its monetary policy on hold saying further information should allow the board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.

• China’s Caixin services PMI jumped in July to its highest level in almost one year, in line with last Friday’s official non-manufacturing PMI. The details show an improvement in new business and a limited acceleration in new hiring.

• China’s central bank sounded more upbeat on the US economy, saying it is recovering moderately, but repeated that risks in global financial markets have risen and it will maintain a prudent monetary policy and keep the yuan stable at a reasonable level.

• Brent crude oil prices fell back below $50/barrel as data showed OPEC’s crude production increased in June. Nigeria raised output following repairs to some damaged infrastructure. The WTI oil price is hovering around $48/barrel.

• Today, the eco calendar contains the euro zone (final) and UK services PMI, the euro zone retail sales and US factory orders. The Bank of England releases its financial stability report and Fed’s Dudley is 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

Tuesday, 05 July 2016

P. 2

Lackluster trading with modest risk-off flavour

Yesterday, in a thinly traded session in absence of US traders, the four day risk-on rally ran into resistance and profit taking. German bonds didn’t really profit much, until a late session modest rise tilted them into positive territory. The spread widening in EMU bond markets was also minor. Bigger (up)-moves were registered for safe havens gold and especially silver. The dollar was little changed. In a daily perspective the German curve bull steepened, with yields down 2 (2-yr) to 1.5 (10-yr) lower. The 30-year yield was fractional higher. The 2-yr set a new low. The market now expects a 10 bps depo-rate cut towards October/November and an additional 10 bps depo-rate cut towards mid-2017. The impact on the periphery and semi-core bonds was minor. Following a sharp narrowing in 10-year yield spreads versus Germany last week, spreads went out 2 to 3 basis points for Italy/Spain and semi-core Belgium/France.

Concerns about the Italian banking sector triggered the equity selling. PM Renzi said that he would recapitalize its banks via taxpayers’ money if needed. The ECB and Commission resists such a move based on the new resolution rules that oblige first a bail in of creditors. On top of that the ECB asked Monte di Paschi, one of the weakest Italian banks, to draw up a plan for tackling its bad-loan burden and reduce its load of soured debt. The EuroStoxx lost about 0.9%, Milan 1.7%. However, the banking sector wasn’t hit the hardest. The car and financial services sector performed even worse.

Unattractive calendar

The euro zone eco calendar contains the final June euro zone services PMI and the May retail sales. In the US, only the factory orders are published, while Fed’s Dudley is scheduled to speak. According to the preliminary estimate, the euro zone services PMI weakened from 53.3 to 52.4, well below the market consensus of 53.2. The final reading is expected to confirm this outcome, but we see risks for an upward surprise as also the manufacturing PMI was revised higher. Euro zone retail sales are expected to have rebounded by 0.4% M/M in May following a flat outcome in April. German retail sales were strong, but French consumer spending and Spanish retail sales disappointed. We believe therefore that the risks are for a weaker outcome due to poor weather conditions in large parts of the area. In the US, factory orders are forecast to have dropped by 0.8% M/M in May following a 1.9% M/M increase in April. A significant part of the data is already available via the durables and therefore the release will probably be ignored.

Rates

US yield -1d2 0,5893 -0,00805 0,9817 -0,022510 1,4204 -0,035630 2,1907 -0,0499

DE yield -1d2 -0,6690 -0,01605 -0,5810 -0,020010 -0,1403 -0,023230 0,3905 -0,0248

Bund (Black)) & EuroStoxx (orange): Risk-off due to Italian banking woes, but moves not very outspoken, as absence of US traders keeps

many investors aside

German 2-yr yield sets new closing low, as markets discount 20 bps of rate cuts in one-year perspective.

T

Thin trading, as US markets were closed

Four days risk-on rally fizzles out on Italian banking woes

Minor gains for German bonds and minor spread widening periphery.

Gold & silver continue to rally

Upside risk final EMU PMI ,but downside risks EMU retail sales

Fed Dudley speaks

Tuesday, 05 July 2016

P. 3

The EMU issuance calendar remains quite busy this week. Today, Austria taps the 0.75% Oct2026 and the 6.25%% Jul2027 for an amount of €1.1B, while Germany holds a tap of its IL 0.10% Apr2046 for a limited amount of €0.5B. These taps shouldn’t make fuss. Total weekly issuance amounts to about €21B, but redemptions and coupon payments (mostly from Germany) amount to €33B, which is auction supportive.

US equities key now; post-Brexit losses are recouped

Overnight, the slight risk-off in European markets yesterday carried over into Asia, where the week long equity rally is aborted. Also commodities lose some ground with Brent oil again below €50/barrel and copper down too. Precious metals (safe havens) do well. The Yen is slightly stronger versus the US dollar, which is marginally stronger versus euro. The US T-Note future trades higher. Overall this suggests the Bund should open quite well.

Today, the eco calendar contains the final June EMU services PMI and the May retail sales, while in the US, the factory orders are released. We see mixed risks compared to consensus, but expect no lasting impact on markets. NY Fed Dudley will probably, just like vice-chair Fischer, suggest the Fed will stay put for now (which wouldn’t surprise anyone). He will remain silent on the longer term outlook, as US payrolls are looming and time is needed to assess the post-Brexit effects. The BoE releases its Financial Stability Report and BoE Carney gives a press conference. He may announce that banks should no longer hold the cyclical capital buffers, given that an economic downturn is expected. This is a (modest) loosening of policy. In the wake of the Brexit-vote, central banks suggested more accommodation might be forthcoming. As a result, riskier assets did well, as did core bonds and other safe havens. US Equities have recouped post-Brexit losses. Peripheral spreads have retraced more or less the initial widening, while semi-core spreads are narrower. German bonds are at new lows across the curve, while US ones are testing the lows (10 & 30yr).

The downside in core bonds is still well protected and some advance is still possible, but as they are already expensive, also due to the discounted central bank actions, further gains may be difficult. It probably depends now on (US) equities. They are near the highs, but a break above would be surprising as there are lots of uncertainties ahead. If they don’t move above the highs, a correction may occur and core bonds could gain more ground. For today, the environment looks bond positive, but traders will be cautious ahead of the US payrolls on Friday.

R2 170 -1dR1 168,86BUND 167,26 0,4000S1 165,68S2 163,61

German Bund: remains well bid recently despite risk-on rally. Now, they need risk-off sentiment to gain more.

US Note future: Rather expensive unless the Fed should start cutting rates. If US equities move above the highs, US bonds should correct

lower. Equity correction may give US bonds upward momentum.

U

Tuesday, 05 July 2016

P. 4

Dollar still looking for a clear post-Brexit trend

On Monday, the post Brexit global equity rebound ran into resistance as uncertainty on the Italian bank recapitalisation plan weighed. However, the equity slowdown had little impact on EUR/USD and USD/JPY. Both cross rates held within last week’s tight ranges. EUR/USD closed the session at 1.1154 (from 1.1136 on Friday). USD/JPY finished the session at 102.56 (from 102.52).

This morning, Asian equity indices fall prey to profit taking. Uncertainty on the Italian Bank recapitalisation plan remind investors of a the multiple issues facing the European and the global economy post Brexit. Chinese equities outperform, trading close to unchanged, maybe due to a stronger Caixa services. The Japan services PMI dropped into contraction territory, declining from 50,4 to 49.4. Profit taking on recent risk-on gains is supporting the yen. USD/JPY trades in the low 102 area. EUR/USD holds on in the well-known 1.1135 area. Commodities including oil are correcting lower. The reserve Bank of Australia left its policy rate unchanged at 1.75%. The RBA repeated that a rise of the AUD could complicate the process of economic adjustment, but gave no hint about more easing. The Aussie dollar lost ground in the run-up to the announcement but corrected slightly afterward. AUD/USD trades currently near 0.7520.

Today, US investors return from a long weekend. The calendar contains a few releases. According to the preliminary estimate, the euro zone services PMI weakened unexpectedly from 53.3 to 52.4. We see risks for an upward surprise/revision as was the case for the manufacturing PMI. Euro zone retail sales are expected to have rebounded by 0.4% M/M in May. German retail sales were strong, but French consumer spending and Spanish retail sales disappointed. We put the risks for a weaker outcome. US factory orders are forecast to have dropped by 0.8% M/M in May following a 1.9% M/M increase. A significant part of the data is already available via the durables and therefore the release will have a limited trading impact. In a day-to-day perspective, we look out whether the global equity rally will run into resistance. If so, it might be slightly negative for USD/JPY and EUR/USD. However, as the impact of the risk on rally on both cross rates was limited, a real correction is probably needed to push both cross rates out of the established ranges. The press conference from BoE Carney after the publication of the Financial stability report is a wildcard and might leave traces on global trading.

Currencies

R2 1,1428 -1dR1 1,1189EUR/USD 1,1129 -0,0007S1 1,0913S2 1,0822

EUR/USD & USD/JPY still trading sideways as post-Brexit rally slows.

EUR/USD: no clear post-Brexit trend

USD/JPY declines (slightly) as risk-on rally runs into resistance

Asian equities falling prey to modest profit taking

USD/JPY slides to low 102 area

AUD stabilizes as RBA give no hint about easing

Eco calendar modestly interesting.

Will the risk-on rally halt?

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

CB comments remain a wildcard

Tuesday, 05 July 2016

P. 5

Since last Tuesday, riskier 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. The working hypothesis is that the 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 (24 June low) and 1.0822 (March correction low).The context is also intrinsically yen positive, but markets stay reluctant to push USD/JPY aggressively below 100 as they feel uncomfortable with the risk of Japanese (or even coordinated) action.

Will Carney (pre)announce further easing?

During the weekend UK Fin Min Osborne launched the idea to reduce the UK corporate tax rate to 15%. In theory, fiscal stimulus should be supportive for the currency. Sterling traded slightly stronger against the euro early in the session, but this was mostly a technical correction on the rejected test of the 0.84 area. The UK construction PMI dropped sharply into contraction territory (from 51.2 to 46.0) indicating that the sector was already under pressure before the Brexit referendum. Sterling lost temporary ground against the euro and the dollar upon the publication of the report. However, it was no strong enough driver to push sterling to new lows. EUR/GBP closed the session at 0.8392 (from 0.8387 on Friday). So, the correction (0.8406) top remains within reach. Cable closed the session at 1.3287 (from 1.3267 on Friday).

This morning, sterling is trading slightly softer as risk-off weighs. Later today, the UK services PMI will be published. The manufacturing PMI surprised on the upside, but the construction PMI declined sharply into contraction territory. The services PMI is expected to decline from 53.5 to 52.7. Even as sentiment improved in the days just before the referendum, we see downside risks for the PMI. However, the focus will probably be on the BoE financial stability report and the press conference of BoE’s Carney. If he (pre)announces technical measures (easing of the cyclical capital buffers) or reiterates that there is room for an interest rate cut in the very near term, it might weigh on sterling and push the sterling to new lows against the euro, and maybe against the dollar.

R2 0,85 -1dR1 0,8406EUR/GBP 0,84 0,0023S1 0,7794S2 0,7717

EUR/GBP tests post-Brexit top

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

Tuesday, 05 July 2016

P. 6

Tuesday, 5 July Consensus Previous US 15:45 ISM New York (Jun) -- 37.2 16:00 IBD/TIPP Economic Optimism (Jul) 48.3 48.2 16:00 Factory Orders (May) -0.8% 1.9% Australia 06:30 RBA Cash Target A 1.75% 1.75% Japan 04:00 Nikkei PMI Services (Jun) A 49.0 50.4 China 03:45 Caixin China PMI Services (Jun) A 52.7 51.2 UK 10:30 Official Reserves Changes (Jun) -- -$1168m 10:30 Markit/CIPS Services PMI (Jun) 52.8 53.5 10:30 Markit/CIPS Composite PMI (Jun) 52.0 53.0 EMU 10:00 Markit Services PMI (Jun F) 52.4 52.4 10:00 Markit Composite PMI (Jun F) 52.8 52.8 11:00 Retail Sales MoM YoY (May) 0.4% / 1.7% 0.0% / 1.4% Germany 09:55 Markit Services PMI (Jun F) 53.2 53.2 France 09:50 Markit Services PMI (Jun F) 49.9 49.9 Italy 09:45 Markit/ADACI Services PMI (Jun) 50.4 49.8 Spain 09:15 Markit Spain Services PMI (Jun) 55.0 55.4 Sweden 08:30 Swedbank/Silf PMI Services (Jun) -- 54.4 09:30 Industrial Production MoM YoY (May) 0.2% / -- 0.1% / 3.5% 09:30 Industrial Orders MoM YoY (May) -- -0.5% / 0.4% 09:30 Service Production MoM YoY (May) -- 1.7% / 5.4% Events 11:30 BoE Publishes Financial Stability Report 12:00 BoE Governor Carney Gives Press Conference in London 20:30 Fed's Dudley Speaks on Local Economy in Binghamton, NY Austria RAGB Auction (€1.1B 0.75% Oct2026 & 6.25% Jul2027) Germany IL Bund Auction (€0.5B 0.10% Apr2046)

Calendar

Tuesday, 05 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.

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10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 1,42 -0,04 US 0,59 -0,01 DOW 17949 17949,37DE -0,13 -0,01 DE -0,66 -0,01 NASDAQ for Exch - NQI #VALUE!BE 0,21 0,00 BE -0,58 0,01 NIKKEI 15669 15669,33UK 0,84 -0,02 UK 0,14 -0,01 DAX 9709,09 9709,09JP -0,25 0,00 JP -0,33 0,00 DJ euro-50 2862 2862,21

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,315 0,0063y -0,240 0,820 0,499 Euribor-1 -0,36 0,00 Libor-1 USD 0,48 0,485y -0,146 0,965 0,583 Euribor-3 -0,29 0,00 Libor-3 USD 0,52 0,5210y 0,304 1,313 0,935 Euribor-6 -0,18 0,00 Libor-6 USD 0,62 0,62

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,11285 -0,0005 EUR/JPY 113,64 -0,60 194,2599 1341,8 49,55USD/JPY 102,13 -0,50 EUR/GBP 0,84 0,0023 - 1d 0,00 -9,24 -1,17GBP/USD 1,3244 -0,0040 EUR/CHF 1,0811 -0,0030AUD/USD 0,7515 0,0009 EUR/SEK 9,3919 0,00USD/CAD 1,2875 -0,0002 EUR/NOK 9,2569 -0,02