Thursday, 12 May 2016

P. 1

Rates: Core bonds treading water around, but below resistance levels

Usual correlations between core bonds and equity markets or core bonds and oil prices are very loose recently. Amid an uneventful calendar, both the Bund and US Note future continue treading water around the upper bound of their respective sideways trading channels. No changes expected today…

Currencies: Dollar slightly softer as global sentiment on risk deteriorates

Yesterday, the dollar lost slightly ground against the yen and the euro as global equity sentiment eased. A rebound of oil this time didn’t help the dollar. Today, more technical trading is expected in EUR/USD and USD/JPY ahead of tomorrow’s US data. Soft BoE comments after the publication of a new inflation report might weigh on sterling.

Calendar

• US Equities reversed most of Tuesday’s strong gains, dropping 1%, despite a

significant rebound in the oil price. This morning, Asian shares trade mixed to slightly lower. Japanese shares outperform, boosted by a weaker yen.

• ECB’s Weidmann said subzero interest rates and large-scale bond purchases are justified for now, but he warned that policies involved various risks and side-effects, including the possibility of a sharp jump in interest rates, adding that the ECB should avert being “taken hostage” by investors or governments.

• Brent crude oil prices jumped more than 4% yesterday as crude US inventories dropped unexpectedly for the first time since March as imports dropped, government data showed. The Brent is currently trading around $47.50/barrel.

• British surveyors reported the sharpest fall in enquiries from potential homebuyers since 2008 last month, reflecting a new tax on landlords and the upcoming referendum on European Union membership, the RICS said today, adding that house prices continued to move higher.

• Bank of Japan governor Kuroda stressed this morning they will adjust policy without hesitation in all three dimensions if needed for the price target. Kuroda added big FX moves are undesirable, but added that it is difficult for Japan to internationally weaken the yen due to agreements with the G7, G20.

• Today, the eco calendar contains the US jobless claims and euro zone industrial production data. The Bank of England and Norges Bank will decide on rates and also the new BoE inflation report will be published.

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

Thursday, 12 May 2016

P. 2

Strange intraday moves, but in the end little changes

Yesterday, global core bonds had another uninspiring day with some strange moves that don’t fit “normal” bond trading patterns. However, in the end, little changed. The Bund was initially supported by weaker equities but couldn’t threaten the contract high. The contract erased gains when oil prices spiked higher around noon and despite still weak equities. The US T-Note did absolutely nothing till the oil inventories showed a downward surprise that pushed oil well above the $47/b mark (Brent). Contrary to what can be expected, the US T-Note started rising, maybe due to sliding equities. A tremendous US 10-year Note auction pushed the T-Note future to a day high (131-03). The T-Note future couldn’t hold on to the gains and closed modestly higher on the day, but those gains were erased overnight. In after-trade, the Bund erased all intraday losses. Both Bund and US 10-year Note future stay near resistance.

In a daily perspective, changes on the German yield curve were less than 1 bp. The US curve was mixed with the longer end outperforming the shorter end. 2-yr and 5-yr yields added 0.6 bps and 1.6 bps. The 10- and 30-yr yields fell 2.5 to 3.1 bps. On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed up to 3 bps with Portugal (-10 bps, good auction) and Greece (-28 bps, follow-through after Eurogroup) outperforming. The German (2-yr Schatz), Portuguese (10-yr PGB) and Spanish (50-yr Obligacion) auctions went all very well.

Today: US claims and EMU production for release

In March, euro zone industrial production is forecast to have stabilized following a limited drop in February. We believe however that the risks are for a downward surprise after disappointing data from Germany and France. In the US, initial jobless claims are expected to have dropped slightly in the past week, by 4 000 to 270 000, following a significant increase in the week before. The risks are for a stronger decline following the significant increase previously.

Central bankers are active too with Fed’s Mester, Rosengren, George and ECB’s Constancio scheduled to speak. Mester and George (dissenter in favour of higher rates) are hawks, while Rosengren is a dove, who nevertheless defended the idea of two rate hikes this year. In the UK, the Bank of England decides on rates (+ press conference) and publishes its inflation report.

Rates

US yield -1d2 0,7339 0,00795 1,2059 0,003210 1,7309 -0,023430 2,583 -0,0169

DE yield -1d2 -0,5090 -0,00805 -0,3870 -0,005010 0,1220 0,004030 0,8289 0,0018

Bund future (black) & oil price (orange) (intraday): First Bund declines on (modest) uptick oil, but later on it gains despite steep rise of oil

T-Note future (black) & Brent (orange) (intraday): T-Note ignores everything till the oil spike on which is starts rising. Later on, a tremendous 10-yr Note auction is temporary supportive as well

US-

Core bonds have uninspiring session

Peripheral spreads narrow

Strong auctions, more 50-yr issuance!

Downward risks EMU production

Downside risks US claims

Many central bank speakers

BOE meeting

Thursday, 12 May 2016

P. 3

Italy, Ireland and US supply market

The Italian treasury taps the on the run 3-yr BTP (€1.75-2.25B 0.1% Apr2019), 7-yr BTP (€2.25-2.75B 0.95% Mar2023), 15-yr BTP (€1-1.5B 1.65% Mar2032) and off the run BTP (€0.5-1B 3.5% Mar2030). The two very long BTP’s cheapened in ASW spread terms going into the auction, but are expensive on the Italian curve (especially Mar2032). The 7-yr BTP trades also rather rich. Overall, we expect plain vanilla demand. The Irish debt agency auctions the on the run 7-yr IGB (€0.75B 0.8% Mar2022). The bond cheapened slightly going into the auction and trades normal on the Italian curve. We expect no difficulties.

The US Treasury continued its mid-month refinancing operation with a tremendous $23B 10-yr Note auction. The auction stopped 2 bps through the 1:00 PM bid side with a strong bid cover (2.68). Bidding details showed that the auction was especially driven by a very strong indirect bid. Today, the US Treasury holds a $15B 30-yr Bond auction. Currently, the WI trades around 2.58%.

No strong drivers for trading

R2 165 -1dR1 164,6BUND 164,22 -0,0200S1 161,46S2 160,81

Overnight, Asian equity markets trade mixed, ignoring higher oil prices. Brent crude holds above the $47/barrel mark following yesterday’s inventory data. The correlation between oil and core bonds isn’t strong of late. The US Note future trades slightly lower. We expect a neutral opening for the Bund.

Today’s eco calendar contains EMU production data and weekly claims. Risks are on the downside of expectations, but these numbers are second tier and won’t impact markets sustainably. The Bund continues to trade close to the contract high and a test is likely. A temporary break above that level is likely as the German 10-yr yield (0.12%) is still further away for the cycle low (0.07%). Fed speakers include Mester, Rosengren and George and are a wildcard for trading.

Technically, we remain neutral for the Bund (160.81-164.60). A new sell-on-upticks could be considered around the upper bound of this range (test of 0.07% GE 10Y). For the US Note future, we have a similar strategy in the 128-01+ - 131-14 range. Markets have priced in only one Fed rate hike for June 2017. Unless recession risks would rise, there is little scope for a more gradual rate path. Several more “dovish” governors already indicated that two rate hikes in 2016 are a realistic scenario.

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

US Note future: Sideways trading likely in 131-14 to 128-01+ range

US-

Thursday, 12 May 2016

P. 4

Dollar declines on risk-off correction

On Wednesday, the dollar lost slightly ground against the yen and the euro as sentiment turned risk-off. Except for decline of equities and a rebound of oil, there was hardly any news to guide USD trading. So, the moves were technically insignificant. EUR/USD closed the session at 1.1426 (from 1.1372 on Tuesday). USD/JPY finished the session at 108.41 from 109.27, as the equity correction weighed. A sharp rebound of oil this time apparently was a negative rather than a positive for the dollar.

Overnight, most Asian equity indices are trading in negative territory, but the losses are limited given the US correction yesterday. Japanese equities reversed opening losses despite disappointing earnings from bellwethers. The yen is also again losing slightly ground after yesterday’s risk-off driven rebound. BOJ’s Kurada in an interview said that ‘technically’’ yields could go as low as in Europe. The Aussie dollar remains in the defensive despite yesterday’s rebound of commodities. Markets are considering the option of additional RBA rate cuts after the May 03 easing. AUD/USD hovers in the mid 0.73 area. EUR/USD is little changed in the 1.1424 area.

Today, the calendar is again unattractive. The March EMU production is forecast to have stabilized, but we see risks for a downward surprise after disappointing data from Germany and France. In the US, initial jobless claims are expected to have dropped by 4 000 to 270 000. The risks are for a stronger decline following the significant increase previously. The data will only be of intraday significance for FX trading Central bankers are active too with Fed’s Mester, Rosengren, George and ECB’s Constancio scheduled to speak. Mester and George (dissenter in favour of higher rates) are hawks, while Rosengren is a dove. He nevertheless defended two rate hikes this year. However, global factors will probably continue to drive the price action. From yesterday’s price action, we retain that the rebound of oil didn’t help the dollar or equities. Will this pattern be confirmed? For now, we assume more technical inspired trading inn both EUR/USD and USD/JPY ahead of tomorrow’s US retail sales. We think that it’s still too early to bet on a sustained comeback of the yen unless there is outright negative news. At the same time, the dollar remains fragile against the euro, with EUR/USD struggling to move sustainably below 1.14. Tomorrow’s US data might bring some clarity.

Currencies

R2 1,1714 -1dR1 1,1616EUR/USD 1,1416 0,0029S1 1,1217S2 1,1144

EUR/USD off the recent highs, but no follow-through losses yet.

USD/JPY: rebound to slow?

USD losing slightly ground as sentiment on risk turned risk-off

Higher oil doesn’t help the dollar

Today, eco data of second tier importance

More consolidation ahead of tomorrow’s US eco data?

Thursday, 12 May 2016

P. 5

Technically, EUR/USD broke last week above the 1.1495 MT range top on broad-based USD weakness. This break was a technical warning for potential further dollar losses and opened the way for a retest of the key 1.1714 (2015 high). However, the USD decline petered out despite mixed US eco data and a poor US payrolls report. We maintain the view that the US economy is strong enough to allow the Fed to implement two rate hikes later this year. This is not discounted in the interest rate and FX markets. However, there is currently no trigger for a directional change of course. The soft Fed approach, pockets of risk aversion and the Treasury report on currencies pushed USD/JPY to a new lows last week. Verbal Japanese interventions to stop the rise of the yen are likely to continue. We doubt they put the basis for a sustained USD/JPY rebound. We sell USD/JPY in case of a rebound to the recent highs (110/111 area) as we expect some fatigue in the global equity rally (return of risk-off?).

Will soft BoE tone hurt sterling?

On Wednesday, sterling trading was again mainly driven by technical considerations and global market sentiment. The global risk-on rally petered out and weighed slightly on sterling, that reversed Tuesday’s gains. The UK March production data were rather weak, but close to expectations. Still sterling lost a few more ticks after the publication, suggesting a slightly cautious tone on the UK currency ahead of tomorrow’s BoE policy. Cable on the contrary profited from late session USD weakness and closed the day at 1.4448.

Today, the BOE will announce it policy decision, published a new inflation report while governor Carney will give a press conference. It will be a difficult balancing act for Carney not to be accused of taking position in the Brexit debate. That said, the BoE can’t, but acknowledge the slowdown in economic activity, which is at least partially due to uncertainty on Brexit. In this context, will Carney reconfirm that the next BOE rate move will be a rate hike. If he backtracks on this issue or turns further negative on UK growth beyond the Brexit era, it would be negative for sterling. We expect a soft BoE tone today, with downside risk for sterling

The technical picture of EUR/GBP improved as the pair broke above the mid 0.79 area. A counter move occurred last month and threatened to deteriorate the picture. However the sterling rebound petered out. Weakening UK eco data and uncertainty on the referendum are negatives for sterling and this will stay so until the referendum on June 23. We think sterling will stay in the defensive. EUR/GBP might drift higher in the 0.7735/0.8117 range.

R2 0,8117 -1dR1 0,7993EUR/GBP 0,7907 0,0030S1 0,7735S2 0,7652

EUR/GBP: holding near the 0.79 level

GBP/USD: correction slows, for now

Thursday, 12 May 2016

P. 6

Thursday, 12 May Consensus Previous US 14:30 Import Price Index MoM YoY (Apr) 0.6% / -5.4% 0.2% / -6.2% 14:30 Initial Jobless Claims 270k 274k 14:30 Continuing Claims 2120k 2121k 15:45 Bloomberg Consumer Comfort (May 8) -- 42.0 Japan 01:50 BoP Current Account Adjusted (Mar) A ¥1893.6b ¥1733.5b 01:50 Trade Balance BoP Basis (Mar) A ¥927.2b ¥425.2b 01:50 Bank Lending Incl/Ex Trusts YoY (Apr) A 2.2%/2.2% 2.0%/2.0% 04:00 Tokyo Avg Office Vacancies (Apr) A 4.23 4.34 06:30 Bankruptcies YoY (Apr) A -7.08% -13.15% A 07:00 Eco Watchers Survey Current (Apr) A 43.5 45.4 07:00 Eco Watchers Survey Outlook (Apr) A 45.5 46.7 UK 01:01 RICS House Price Balance (Apr) A 41% 42% 13:00 Bank of England Bank Rate/Asset Purchase Target 0.50%/375B 0.50%/375B EMU 11:00 Industrial Production MoM YoY (Mar) 0.0% / 0.9% -0.8% / 0.8% Germany 08:00 Wholesale Price Index MoM YoY (Apr) -- 0.3% / -2.6% France 08:45 CPI EU Harmonized MoM YoY (Apr F) 0.1% / -0.1% 0.1% / -0.1% 08:45 CPI MoM YoY (Apr F) 0.1% / -0.2% 0.1% / -0.2% Greece 11:00 Unemployment Rate (Feb) 24.2% 24.4% Norway 10:00 GDP QoQ (1Q) 0.2% -1.2% 10:00 GDP Mainland QoQ (1Q) 0.2% 0.1% 10:00 Deposit Rates 0.50% 0.50% Sweden 08:00 PES Unemployment Rate (Apr) -- 4.0% 09:30 CPI MoM YoY (Apr) 0.1% / 0.9% 0.5% / 0.8% 09:30 CPI CPIF MoM (Apr) 0.1% / 1.5% 0.5% / 1.5% Events 09:00 Swedish Parliament Hearing on Monetary Policy 13:00 Bank of England Inflation Report 13:30 BoE Governor Carney Holds Press Conference on Inflation Report 17:00 Fed's Mester Speaks About Inflation Dynamics 17:45 Fed's Rosengren Addresses New Hampshire Chamber 18:40 ECB's Constancio Speaks in Madrid 19:30 Fed's George Speaks on Economy in Albuquerque Italy Bond Auction (€2.25B 0.1% 2019, €2.75B 0.95% 2023, €1B 3.5% 2030, €1.5B

1.65% 2032)

Ireland Bond Auction (€0.75B 0.8% 2022) US Bond Auction ($15B 2046)

Calendar

Thursday, 12 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 1,73 -0,02 US 0,73 0,01 DOW 17711 17711,12DE 0,13 0,01 DE -0,51 0,00 NASDAQ for Exch - NQI #VALUE!BE 0,52 -0,02 BE -0,47 0,01 NIKKEI 16646 16646,34UK 1,39 -0,01 UK 0,36 -0,01 DAX 9975,32 9975,32JP -0,11 -0,01 JP -0,25 0,00 DJ euro-50 2957 2956,71

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,335 -0,0023y -0,140 0,960 0,831 Euribor-1 -0,35 0,00 Libor-1 USD 0,51 0,515y -0,005 1,149 0,994 Euribor-3 -0,26 0,00 Libor-3 USD 0,59 0,5910y 0,520 1,570 1,423 Euribor-6 -0,14 0,00 Libor-6 USD 0,73 0,73

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,14165 0,0030 EUR/JPY 124,28 0,51 183,3354 1272,26 47,47USD/JPY 108,88 0,16 EUR/GBP 0,7907 0,0031 - 1d 3,05 0,06 2,14GBP/USD 1,4431 -0,0019 EUR/CHF 1,1091 0,0002AUD/USD 0,7334 -0,0026 EUR/SEK 9,2853 0,01USD/CAD 1,2851 -0,0056 EUR/NOK 9,3236 -0,01