Thursday, 26 May 2016

P. 1

Rates: More repositioning if Fed Powell joins hawkish rhetoric?

Regional Fed-governors vocally supported a Summer rate hike the past week, but it remained quiet from the Washington-based Fed board. Today’s speech by Fed governor Powell could therefore be key for trading. If he joins the hawkish rhetoric, it would send a strong signal to markets about the Fed’s determinedness and trigger more repositioning (US bear flattening).

Currencies: Dollar rally shifts into a lower gear

Yesterday, the dollar held near the recent highs against the euro and the yen. However, there were no additional gains even as the equity rally continued. Today, the focus is on the US data (durable orders and claims). If the equity rally slows, the dollar might also take a breather.

Calendar

• US equities extended their gains yesterday, rising another 0.7% led by the

energy sector. This morning, Asian shares trade mixed. Chinese stocks continue to underperform, falling for a third straight session. Japanese shares trade slightly higher, ignoring the stronger yen.

• The Brent crude oil price jumped this morning above the key psychological level of $50/barrel, for the first time since November last year, supported by strong US inventory data released yesterday. Also the WTI oil price is nearing the $50/barrel level.

• China’s Foreign Minister called on G7 leaders to focus on urgent economic and financial matters and warned they did not want to see actions that escalate tensions in the region over territorial disputes in the South and East China Seas.

• The Canadian dollar strengthened from its lowest level in nearly seven weeks after the Bank of Canada held rates unchanged and sounded more optimistic on the prospects for growth. While Q2 growth forecasts were lowered due to the wildfires, they said growth will rebound next quarter supported by increasing oil production.

• The Chinese government’s determination to defend the country’s growth targets and the impact of stimulus measures already taken will support Chinese economic growth this year and next, Fitch Ratings said, but warned that growth will drop below 6% in 2018.

• Today, the eco calendar contains the second estimate of UK Q1 GDP, the US jobless claims and durable goods orders. G7 leaders start their Summit in Japan and Fed’s Bullard and Powell are 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

Thursday, 26 May 2016

P. 2

Front end Greek curve outperforms

Yesterday, global core bonds held up well against the background of rising equities. Brent crude traded higher and approached the €50/barrel threshold, which was tested overnight. Equities eked out juicy gains. A stronger German IFO-reading, a weaker US Markit services PMI and a very strong US 5-yr Note auction had no impact. Bunds slightly outperformed US Treasuries. In a daily perspective, the German yield curve bull flattened with yields 0.5 bps (2-yr) to 4.1 bps (30-yr) lower. US yields changed less than 1 bp till the 10-yr tenor and ended 1.9 bps higher at the 30 yr. On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed up to 5 bps (Portugal).

The impact from Tuesday’s Eurogroup meeting on Greek assets was larger at the front end of the curve (-100 bps). The Eurogroup agreed to disburse the next aid tranche (short term default avoided) and creditors decided to grant conditional debt relief when the programme ends in 2018. An important consequence might be that the ECB reinstalls a waiver on Greek bonds, allowing banks to use them again as collateral for funding (cheaper than ELA). There are still obstacles for the ECB to buy Greek bonds in its PPSP programme. The ECB sets limits for the amount of government debt of any particular country it can hold. Greece exceeds these limits because of purchases of its bonds made under earlier emergency programmes. While Greece would go under those limits if it makes repayments to the ECB in late July, the governing council would also need to undertake a sustainability analysis of Greece’s debt. New QE purchases are also be subject to blackout periods between the conclusion of reviews by institutions monitoring Greece’s bailout programme. In any case, Greece has few bonds outstanding, as most of its debt consists of loans.

Today, focus on US durables and claims

In April, US durable goods orders are forecast to increase for a second straight month, albeit at a somewhat slower pace than in March, 0.5% M/M vs 1.3% M/M. Strong orders for motor vehicles and parts are expected to boost the headline reading. Excluding transportation, orders are forecast to show a limited 0.3% M/M increase, reversing the 0.2% M/M drop in March. For the ex-transportation reading, we continue to see downside risks as demand for durable goods remains probably poor due to a lack of demand from abroad and continued downsizing in the energy sector. Initial jobless claims are forecast to have dropped slightly further in the week ending the 21st of May, from 278 000 to 275 000. We see risks for a lower outcome as claims are still somewhat above their recent trend without obvious reason. Finally, pending home sales are forecast to extend their gradual uptrend, rising by 0.7% M/M in April.

Rates

US yield -1d2 0,9264 0,02935 1,4112 0,047810 1,8664 0,040130 2,6464 0,0278

DE yield -1d2 -0,5050 -0,00105 -0,3530 0,004010 0,1790 0,013030 0,9053 0,0106

Core bonds held up well in face strong equities and oil

Longer end German curve outperforms

Peripheral spread narrowing after Greek deal

Bund future (black) & EuroStoxx (orange) (intraday): Bund holds up well in face of strong equities and higher oil prices.

Will S&P test once more the highs?

U

Short end Greek curve profits from deal

Waiver for allowing Greek bonds to be used as collateral possible

Obstacles for ECB waiver to buy bonds

Short end Greek curve profits from deal

Waiver for allowing Greek bonds to be used as collateral possible

Obstacles for ECB waiver to buy bonds

Downside risks US durables and initial claims

Thursday, 26 May 2016

P. 3

Another strong US auction

The US Treasury continued its end-of-month refinancing operation with a strong $34B 5yr Note auction and an uninteresting $13B 2-yr FRN auction. The auction stopped through the 1:00 PM bid side with the largest bid cover in 18 months (2.6). Bidding details showed especially strength in the indirect bid, reflecting foreign investor demand. Today, the Treasury ends its refinancing operation with a $28B 7-yr Note auction. Currently, the WI trades around 1.675%.

Bond markets remain unconvinced about Fed

R2 165 -1dR1 164,6BUND 163,51 -0,1500S1 161,46S2 160,81

Overnight, Asian stock markets trade mixed. Brent crude rose above $50/barrel for the first time since November last year. Data showed yesterday that US crude stocks declined far more than expected last week. The US Note future trades nevertheless slightly higher. Traditional correlations have been very loose of late. Core bonds actually held strong this week despite surging equities, higher oil prices and hawkish Fed talk.

Today’s eco calendar contains US durable goods orders and weekly jobless claims. Risks for the core durables are on the downside of expectations while claims could be lower than expected. That’s a mixed signal for markets. Fed governors Bullard and Powell are scheduled to speak. We pay special attention to the latter. Of late, several regional Fed governors talked in favour of a Summer rate hike, but it remained quiet from the Washington-based front. If Powell endorses the similar idea, we expect it to be negative for US Treasuries with more underperformance of the front end of the US yield curve.

Longer term, the Bund remains in the sideways channel between 160.81 and 164.60. We would sell on upticks near the resistance for a move back deeper in the range. In yield terms, 0.07% is key support for the German 10-yr yield. The US Note future trades in the middle of the 128-01+ to 131-14 sideways range. A June rate hike is a plausible scenario, which is far from completely discounted by markets (34% probability). Therefore, we expect more price action towards the downside of the range. Short-term (2y/5y) spread differentials between the US and Europe could widen further on the hawkish repositions of US bond markets. The front-end of European yield curve is locked by the ECB’s easy monetary policy.

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

Thursday, 26 May 2016

P. 4

USD rally to slow?

On Wednesday, the gains of the dollar slowed given another session of strong equity gains. Eco data were again largely ignored. EUR/USD hovered near the recent lows in the mid 1.11 area for most of the day. The pair closed the session at 1.1160 (from 1.1141 on Tuesday). USD/JPY touched intraday highs in the 110.45 area, but closed the session at 110.19, only slightly higher from Tuesday’s close . (109.99).

Overnight, Asian equities show a mixed picture. Japanese equities still continue the risk-on rally, while the picture on other regional markets is mixed with Chinese indices down about 1% or more. Brent oil traded north of $50 p/b as US inventories were reported sharply lower than expected yesterday. Other commodities are also slightly higher. Australia Q1 private capital expenditure declined more than expected. The Aussie dollar stabilizes near the recent lows in the 0.72 area. USD/JPY suddenly dropped about half a big figure in early dealings, but no clear explanation is available. USD/JPY trades currently around 109.75. The decline of USD/JPY also weighs slightly on other USD cross rates. EUR/USD rebounds slightly and trades currently in the 1.1180/85 area.

Today in the US, the April durable goods orders are forecast to have increased for a second straight month, albeit at a somewhat slower pace, 0.5% M/M vs 1.3% M/M. Excluding transportation, orders are forecast to show a limited 0.3% M/M increase. For the ex-transportation reading, we see downside risks as demand for durable goods remains probably poor due to a lack of demand from abroad and continued downsizing in the energy sector. Initial jobless claims are forecast to have dropped slightly further from 278 000 to 275 000. We see risks for a lower outcome as claims are still above their recent trend without obvious reason. So, US data won’t provide clear directional guidance for USD trading.

Yesterday, the dollar rebound slowed even as equity sentiment in Europe and in the US remained constructive. Asian markets and equity futures this morning suggest a pause in recent equity rally. If so, the momentum might turn slightly less USD supportive.

Currencies

R2 1,1616 -1dR1 1,1349EUR/USD 1,1152 -0,0063S1 11,1058S2 1,1012

EUR/USD: test of 1.1144 support rejected, for now.

USD/JPY: topside test again rejected?

Tion

The dollar held near the recent highs as sentiment on risk remained positive.

US durable orders and the jobless claims in the spotlight

USD rally to slows in line with equities?

Thursday, 26 May 2016

P. 5

The US currency might fall prey to some modest profit-taking as investors wait for more clear guidance from the Fed or from the eco data. We are in no hurry to add USD long exposure after the recent rally. Look to sell on more pronounced upticks e.g. in the 1.13/14 area.

Technically, the March/April USD decline petered out. The dollar strengthened, gradually supported by more hawkish Fed comments/Minutes that opened the door for a possible June rate hike. We maintain our view that the US economy is strong enough to allow the Fed to implement two rate hikes this year. If the eco data don’t disappoint, chances for a June rate hike increase, supporting the dollar. EUR/USD dropped below a first support at 1.1217 and tested the 1.1144 supported over the previous days. However, a sustained break didn’t occur (yet). A break below this level would be USD positive, but it might be too early for further sustained USD gains. USD/JPY dropped to new lows early May. Verbal Japanese interventions and a global, Fed-driven USD rally blocked the downside of USD/JPY. The high 111 area is a resistance, where USD/JPY might run into resistance if global risk sentiment would worsen (due to higher US rates or other event risk). The US disapproval for yen interventions is yen supportive if sentiment would turn risk-off.

Sterling extends gains. Slowdown ahead

On Wednesday, sterling traded again with a positive bias. Investors adapted sterling positions as polls showed an increasing lead for the ‘Remain camp’ in the referendum. There were no eco data in the UK yesterday. A positive risk sentiment and oil holding near the recent highs also supported sterling. PM Cameron and Fin Min Osborne referred to a new study as they warned on the negative consequences of Brexit. EUR/GBP dropped below the 0.76 barrier and closed the session at 0.7590 (from 0.7613). Cable still outperformed. The pair filled offers north of 1.47 and closed the day at 1.4697. The 2016 high comes on the radar.

Today, the BBA loans for home purchases and the details of the UK Q1 GDP will be published. Both series have potential to move the market intraday, but they are probably no game-changers. The ongoing high oil price might be slightly supportive for sterling. However, a slowdown in the risk-on rally might also trigger a pause in the recent sterling rebound, especially against the euro. We see room for some consolidation or even a modest rebound in EUR/GBP.

Of late, the negative sterling momentum eased. Markets adapted positions to a lower probability of a Brexit. EUR/GBP dropped below important support at 0.7735 and at 0.7650. This break further improved sterling sentiment. However, we think that a breather on the recent sterling rally is needed first.

R2 0,8117 -1dR1 0,7947EUR/GBP 0,7631 -0,0109S1 0,7562S2 0,7312

EUR/GBP dropped below 0.7650 support.

GBP/USD nears the 2016 top

Thursday, 26 May 2016

P. 6

Thursday, 26 May Consensus Previous US 14:30 Initial Jobless Claims (May 21) 275K 278k 14:30 Continuing Claims (May 14) 2140K 2152k 14:30 Durable Goods Orders (Apr P) 0.5% 0.8% 14:30 Durables Ex Transportation (Apr P) 0.3% -0.2% 15:45 Bloomberg Consumer Comfort (May 22) -- 42.6 16:00 Pending Home Sales MoM YoY (Apr) 0.7%/0.1% 1.4%/2.9% Japan 01:50 PPI Services YoY (Apr) A 0.2% 0.2% China 03:00 Swift Global Payments CNY (Apr) A 1.82% 1.88% UK 10:30 BBA Loans for House Purchase (Apr) 44700 45096 10:30 GDP QoQ YoY (1Q P) 0.4% / 2.1% 0.4% / 2.1% Italy 10:00 Retail Sales MoM YoY (Mar) -- 0.3% / 2.7% 11:00 Hourly Wages MoM YoY (Apr) -- 0.0% / 0.8% Spain 09:00 GDP QoQ YoY (1Q F) 0.8%/3.4% 0.8% / 3.4% Sweden 09:00 Consumer Confidence (May) 98.0 97.1 09:00 Manufacturing Confidence s.a. (May) 108.6 107.9 09:00 Economic Tendency Survey (May) 105.5 104.6 09:30 Trade Balance (Apr) 2.5b 3.9b Events 26-27/05 G7 Leaders Hold Summit in Japan 12:10 Fed's Bullard Speaks in Singapore 18:00 Fed's Powell Speaks About Economy at Peterson Institute Italy CTZ Auction (€2.5B 0% 2018) US 7Yr Notes Auction ($28B)

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 1,86 0,04 US 0,93 0,03 DOW 17706 17706,05DE 0,18 0,00 DE -0,51 0,00 NASDAQ for Exch - NQI #VALUE!BE 0,57 0,00 BE -0,48 -0,01 NIKKEI 16757 16757,35UK 1,47 0,02 UK 0,47 0,03 DAX 10057,31 10057,31JP -0,10 0,00 JP -0,24 0,00 DJ euro-50 3010 3010,12

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,34 -0,0023y -0,120 1,172 0,947 Euribor-1 -0,35 0,00 Libor-1 USD 0,51 0,515y 0,024 1,355 1,122 Euribor-3 -0,26 0,00 Libor-3 USD 0,59 0,5910y 0,575 1,703 1,515 Euribor-6 -0,14 0,00 Libor-6 USD 0,73 0,73

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,1153 -0,0061 EUR/JPY 122,6 0,10 183,3452 1224,82 49,18USD/JPY 109,95 0,66 EUR/GBP 0,7629 -0,0111 - 1d -0,86 -19,68 1,11GBP/USD 1,4612 0,0131 EUR/CHF 1,1059 -0,0048AUD/USD 0,7205 0,0015 EUR/SEK 9,2625 -0,10USD/CAD 1,3100 -0,0062 EUR/NOK 9,2988 -0,08

Calendar

Thursday, 26 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.

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