Tuesday, 06 June 2017

P. 1

Rates: Sideways ahead of big events on Thursday?

The eco calendar lacks impetus for trading today and tomorrow, suggesting investors will be side-lined ahead of Thursday’s big events (ECB meeting, UK election, Comey hearing). The developing crisis in the Gulf region is a wildcard which could influence bond markets via equity markets or oil prices.

Currencies: Dollar continues to struggle; USD/JPY slips below the 110 barrier

Friday’s poor US payrolls report kept the dollar in the defensive. This morning, USD/JPY fell below the psychological barrier of 110. FX traders are looking forward that Thursday’s multiple event-risk with the UK election, ECB meeting and the hearing of former FBI director Comey. Risk aversion might be negative for USD/JPY, but more neutral for EUR/USD.

Calendar

• US equities traded near opening levels during yesterday’s trading session and

eventually closed slightly lower. Overnight, Asian stock markets are mixed with Japan underperforming (-0.5%) on a stronger yen.

• Saudi Arabia blamed the tiny Persian Gulf emirate of Qatar for “financing, adopting and sheltering extremists”. Egypt, the UAE, Yemen and Bahrain joined Saudi Arabia in breaking diplomatic and some commercial ties with Qatar.

• Industries making up the bulk of the US economy continued to expand at a solid pace in May, adding to signs of steady growth this quarter. The May non-manufacturing ISM printed at 56.9 (vs 57.1 consensus), down from 57.5.

• Australia’s central bank kept its policy rate at 1.5% amid growing concerns on the eco outlook. Conditions on the housing market still vary considerably, but there were signs the brisk rises in some markets were “starting to ease.”

• IMF Lagarde has offered a way out of the impasse over Athens' debts that would allow the EMU to release the next aid tranche. She suggested agreeing a deal whereby the IMF would stay on board in the bailout, as Berlin wants, but not pay out further aid until debt relief measures are clarified.

• President Trump will meet with House and Senate leadership today to plot a path forward on health care and tax reform—two of the administration’s top legislative priorities that have been stalled in recent months.

• Today’s eco calendar is very thin with only EMU retail sales and bond auctions in Austria and Germany (inflation-linked).

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Tuesday, 06 June 2017

P. 2

Core bond hot by profit taking awaiting new impetus

Core bonds traded down in the European session in a profit taking move before erasing part of the losses amid thin dealings (aside roll-over activity) in later US trading. With a number of European markets closed, bonds gently slid lower during the European and early US session. The London terror attack, as usual nowadays, barely moved prices, although gilts marginally outperformed. Strong May EMU PMI data were confirmed, even if there were some revisions in the national data. In the US, the Markit services PMI and the Nonmanufacturing ISM were a tad below expectations (but still at healthy levels), while factory orders were in line with expectations but with upward revision for the previous month’s data. Oil prices were temporary higher as Saudi Arabia and allies broke relations with Iran-linked Qatar, but markets shrugged it off and pushed the oil price again below $50/barrel. European equities slid lower after the opening, but soon hovered sideways near the intra-day lows and US equities went nowhere. After the initial slid lower, the Bund and T-Note erased part of the losses in the US mid-morning. The up-move missed momentum though, just like the down-move did before. We qualify the daily price pattern as positioning in thin dealings ahead of new impetus.

In a daily perspective, increases on the German yield curve ranged between 1.3 bp (10-yr) and +2.6 bps (30-yr). The US yield curve bear steepened with yields up between 1 bp (2-yr) and 1.8 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany were close to unchanged.

Thin market calendar without real market mover

The economic calendar is unattractive. In the euro area, only the EMU Sentix investors’ sentiment (June) and the retail sales (April) are up for release. The former is no market mover and closely linked to the equity market movements. It reached in May a 10-year high (pre-crisis) and a stabilization is expected. The EMU retail sales for April are a bit outdated and a not so reliable precursor for consumption. In the US, only the April JOLTS labour market data will be released. They lag the US payrolls with one month and are no market mover. They include additional information though on the breadth of labour market evolutions. We expect them to show additional improvement. No central bank speakers as the black period for both the ECB meeting (Thursday) and the FOMC meeting (next Tuesday/Wednesday) is applicable. Bond auctions are limited to a small Austrian one and a German IL Bund one. Later this week, attention will focus on the ECB meeting, the UK parliamentary elections, both on Thursday and the interrogation of former FBI chief Comey.

Rates

US yield -1d2 1,29 0,015 1,72 0,0010 2,16 0,0030 2,82 0,01

DE yield -1d2 -0,71 0,025 -0,43 0,0210 0,29 0,0130 1,16 0,03

Bund (black) and EuroStoxx 600 (orange) (intraday): Core bonds and equities hit by mild profit taking in dull session

Oil slides again to recent lows and is below $50/barrel mark despit rift between Saudi Arabia and allies and Iran-leaning Qatar

Slight corrective decline core bonds

EMU PMI’s largely confirmed

US service confidence solid, but slightly below expectations

Peripheral and other EMU yield spreads barely changed

Tuesday, 06 June 2017

P. 3

Thin EMU bond supply this week

Austria and Germany (inflation-linked) kick off this week’s scheduled EMU bond supply. The Austrian Treasury taps the on the run 7-yr RAGB (0% Jul2023) and 10-yr RAGB (0.5% Apr2027) for a combined €1.2B. Both bonds didn’t cheapen going into the auction. The Jul2023 RAGB is cheap on the curve while the Apr2027 RAGB sits normal. We expect a plain vanilla auction. Germany sells €500M of its 0.1% 2026 inflation-linked bond. Tomorrow, the German Finanzagentur holds a €3B Bobl auction (0% Apr2022). On Thursday, Ireland sells bonds. The lines and amount on offer still need to be announced.

Sideways ahead of big events on Thursday?

Overnight, Asian stock trade mixed with Japan underperforming (-0.5%) on the back of a stronger yen. The US Note future gains ground, suggesting a stronger opening for the Bund.

The eco calendar lacks impetus for trading today and tomorrow, suggesting investors will be side-lined ahead of Thursday’s big events (ECB meeting, UK election, Comey hearing). The developing crisis in the Gulf region is a wildcard which could influence bond markets via equity markets or oil prices. Safe haven flows could put additional pressure on key support in the US 10-yr yield (2.17%) which is currently under severe pressure.

The Bund is testing the upper bound of the sideways range between 160 (recent sell-off low) and 162.15/49 (recent highs/gap). We expect no sustained break higher as the ECB will probably take (small) steps towards policy normalisation. We expect the central bank to change its forward guidance (drop reference to potentially lower rates) and remove downside risks to its growth scenario. It’s probably too early to lower the monthly amount of asset purchases.

R2 163,99 -1dR1 162,77BUND 162,59 -0,10S1 160S2 158,73

German Bund: testing upper bound of 160-to-162.15/49 trading range ahead of ECB meeting

US Note future (September contract!!!): minor new highs as US 10-yr yield tests key support

Tuesday, 06 June 2017

P. 4

EUR/USD holding near the post-payrolls top, but no follow-through

gains USD/JPY drops below the 110 level.

Dollar struggles; USD/JPY drops below 110 barrier

Trading was mostly technical in nature yesterday. EMU and US eco data had only a limited impact on FX trading. EUR/USD failed to extend its payrolls’ gains. The pair even fell prey to modest intraday profit taking in thin trading. EUR/USD closed the session at 1.1254. USD/JPY hovered in a tight range near the post-payrolls lows as equities traded with a cautious negative bias. There was no additional negative fall-out on USD/JPY though. The pair closed the day at 110.45, almost unchanged from Friday.

Overnight, Asian stock markets trade cautiously negative with Japan underperforming. USD/JPY dropped below the post-payrolls lows, triggering additional yen buying. The pair fell below the psychological barrier of 110 to currently trade in the 109.70 area. USD/JPY’s decline also weighs slightly on the dollar against the euro. The pair returned to the 1.1275 area, but for now the recent top stays out of reach. The decline of EUR/JPY is helping to cap further gains. The Reserve Bank of Australia as expected left its policy rate unchanged. The Aussie dollar lost temporary ground in lockstep with USD/JPY’s decline overnight, but rebounded after the RBA decision. The RBA didn’t profoundly change its assessment on the economy.

The eco calendar is almost empty today. Global factors and upcoming event risk will set the tone for FX trading. Markets will especially look forward to Thursday, with the UK Parliamentary elections, the ECB policy meeting and the testimony of former FBI director James Comey to a Senate committee. Political or other event risk mostly only had a temporary impact on global trading recently. This might again be the case this time, but some investor caution is likely until the uncertainty is out of the way. We expect USD/JPY to remain in the defensive short-term. The picture for EUR/USD might be a bit different. The ECB might make some amendments on its forwards guidance and could remove the downside risks to the economy outlook. As such this could be a precursor for more important action in September. Looking at the recent euro rally, a modestly positive change in the ECB’s assessment is probably already discounted. This might cap further EUR/USD gains. Some ST squaring of positions/profit taking is possible. A cautious risk-off sentiment and the decline of EUR/JPY makes further EUR/USD gains less easy. We keep a neutral bias on EUR/USD and don’t preposition for further gains.

Currencies

R2 1,1428 -1dR1 1,13EUR/USD 1,1272 -0,0007S1 1,0839S2 1,0778

Soft Draghi comments cap EUR/USD topside

Dollar holding near the post payrolls low. At the same time, the euro rebound slows

USD/JPY drops below the 110 barrier as sentiment is cautiously risk-off

EUR/USD holding within reach of the post-post-payrolls top, but no further break yet

Global risk sentiment and upcoming event risk to decide next FX trends.

EUR/USD rally to slow going into the ECB policy decision?

Tuesday, 06 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. At the end of last week, there were tentative signs that the decline could slow. However, the post-payrolls decline and this morning’s break below 110 are making the picture again outright negative. Return action lower in the 108.13/114.37 range remains possible.

Earlier May, EUR/USD failed to break below the 1.0821/1.0778 support (gap). Poor US data and 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 Friday’s disappointing US payrolls, but for now there are no follow-through gains. 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. For now, we don’t preposition for a sustained break of this area. A return below 1.1023 would indicate that the upside momentum has eased.

Sterling decline to slow ahead of the election?

Yesterday morning, sterling trade went into the defensive after the terrorist attack in London. However, the losses were modest and sterling soon returned to levels last seen at the end of the previous week. The UK services PMI declined more than expected from 55.8 to 53.8, but the report was largely ignored as an important factor for sterling trading. Quite the reverse, in technical trade, the UK currency even regained ground gradually later in the session. EUR/GBP closed the session at 0.8721. Cable finished the day at 1.2904.

Overnight, the BRC like-for-like sales declined slightly more than expected (-0.4% Y/Y), but we didn’t see any lasting impact on sterling trading. There are no other important eco data in the UK today. Markets will try to get some insight on the potential impact of the terrorist attack on the outcome of Thursday’s election. The lead of the conservative party is declining, but they are still in pole position. We don’t expect a sustained rebound of sterling, but some profit taking of sterling shorts going into the final stage of the election is possible. So, a break of EUR/GBP beyond the recent top might become more difficult. First resistance comes in the 0.8774/88 area. EUR/GBP 0.8655 is a first minor support. A sustained return below the EUR/GBP 0.86 alert would suggest that the worst is over for sterling.

R2 0,8854 -1dR1 0,8787EUR/GBP 0,8719 -0,0037S1 0,8383S2 0,8314

EUR/GBP: most of the bad news for sterling discounted?

GBP/USD: off 1.30 top, but decline remains modest

Tuesday, 06 June 2017

P. 6

Tuesday, 6 June Consensus Previous US 16:00 JOLTS Job Openings (Apr) 5750 5743 Japan 02:00 Labor Cash Earnings YoY (Apr) A 0.5% 0% 02:00 Real Cash Earnings YoY (Apr) A 0% -0.3% Australia 06:30 RBA Cash Rate Target 1.50% 1.50% UK 01:01 BRC Sales Like-For-Like YoY (May) A -0.4% 5.6% EMU 10:30 Sentix investor confidence (June) 27.4 27.4 11:00 Retail Sales MoM / YoY (Apr) 0.2%/2.1% 0.3%/2.3% Events 11:15 Austria to Sell 0% 2023 & 0.5% 2027 Bonds 11:30 Germany to Sell €0.5B 0.1% I/L 2026 Bonds

10-year td -1d 2-year td -1d Stocks td -1dUS 2,16 0,00 US 1,29 0,01 DOW 21184,04 -22,25DE 0,29 0,01 DE -0,71 0,02 NASDAQ 6295,684 -10,11BE 0,66 0,02 BE -0,56 0,02 NIKKEI 19979,9 -197,38UK 1,04 0,00 UK 0,10 -0,01 DAX 12822,94 0,00

JP 0,05 -0,01 JP -0,15 0,00 DJ euro-50 3579,55 -12,27

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,07 1,62 0,59 Eonia -0,3730 -0,04205y 0,16 1,80 0,77 Euribor-1 -0,3710 0,0010 Libor-1 1,0862 0,000010y 0,77 2,11 1,12 Euribor-3 -0,3290 0,0000 Libor-3 1,2225 0,0000

Euribor-6 -0,2560 -0,0010 Libor-6 1,4282 0,0000

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

EUR/USD 1,1272 -0,0007 EUR/JPY 123,65 -0,93 CRB 177,30 -0,67USD/JPY 109,7 -0,70 EUR/GBP 0,8719 -0,0037 Gold 1289,70 9,50GBP/USD 1,2929 0,0041 EUR/CHF 1,0862 0,0000 Brent 49,28 -0,67AUD/USD 0,7492 0,0049 EUR/SEK 9,7453 0,0193USD/CAD 1,346 -0,0027 EUR/NOK 9,5104 0,0174

Calendar

Tuesday, 06 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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