Tuesday, 28 June 2016

P. 1

Rates: Core bond environment positive, but some calm to return?

Yesterday, another risk-off session with sharp flattening of UK, German and US curves. Overnight the risk aversion faded, but the overall sentiment remains fragile. Will it stay so in Europe? Eco releases are unimportant, but political statements or Draghi statements may abruptly change sentiment.

Currencies: EUR/USD and USD/JPY enter calmer waters even as uncertainty persists

Sterling was still under heavy pressure as the visibility on the political process to handle Brexit remains very low. Cable set a new multi-year low. USD/JPY and EUR/USD entered calmer waters and this process might continue today. However pockets of political uncertainty might still weigh on the euro and sterling further down the road.

Calendar

• Also US equities extended their post-Brexit sell-off with the S&P falling 1.8%

led by materials and financials. This morning, most Asian shares trade slightly higher, supported by expectations of further stimulus in Japan.

• Rating agency Standard & Poor’s cut the UK’s credit rating by two notches to AA with a negative outlook reflecting risks to economic prospects, fiscal and external performance. Overnight, also Fitch lowered the UK’s rating to AA from AA+ with a negative outlook.

• A new report from Moody’s Investors Service warns China’s property market is set to turn a corner as nationwide home sales growth has peaked, predicting the rate of house price growth will moderate to a single-digit speed. The report also forecasts increasing margin pressures and risks for property developers.

• Japan’s Prime Minister Abe instructed yesterday Finance Minister Aso to watch currency markets ever more closer and take steps if necessary after the UK’s vote to leave the EU. The Japanese Economy Minister said it is likely to include assistance for small businesses in an economic stimulus package it will compile after Brexit.

• Brent crude oil prices extended their sell-off yesterday to close at its lowest level in six weeks. This morning, oil prices trade slightly higher, while gold is losing some ground.

• Today, the eco calendar contains the final reading of US Q1 GDP, US Conference Board’s consumer confidence and the Richmond Fed manufacturing index. EU Leaders hold a Summit on Brexit and ECB’s Draghi, Praet and Coeuré 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

Tuesday, 28 June 2016

P. 2

Brexit re-positioning continued for second session

Yesterday, core bonds profited further from the political chaos created by the UK’s Brexit vote. Both the US and German yield curves bull flattened. In a daily perspective, the US yield curve bull flattened for yet another day with yields down between -3.3 bps (2-yr) and -14.6 bps (30-yr). German yields declined by 0.5 bps (2-yr) to 11.3 bps (30-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany were narrowly mixed despite the risk aversion. Rumours about Italian government support to the banking sector might have dampened the blow, but had little (negative) impact on Italian spreads (+2 bps). Spain outperformed (-11 bps) following this weekend’s undecided general election. Investors were apparently satisfied by the disappointing result for the left Eurosceptic Podemos party. Semi-core bond spreads narrowed again modestly (2 bps).

Risk aversion remained name of the game following the pro-Brexit vote. European banking stocks suffered another huge blow. More uncertainty could lay ahead of us as EU officials indicated that negotiations with the UK would only start in October at the earliest, while the Tories shifted their leadership contest forward to early September. Outgoing PM Cameron said the referendum outcome should be respected as rumours were heard louder about a second referendum after a petition in that sense reached the parliament.

EU Summit in Brussels on Brexit

Today, the eco calendar will still be overshadowed by the Brexit. In June, US Conference Board’s consumer confidence is expected to have improved slightly following two consecutive monthly declines. The consensus is looking for an increase from 92.6 to 93.5, but we continue to see downside risks following the disappointing May payrolls. The Richmond fed manufacturing index is expected to extend its volatile pattern, rebounding from -1 to 3. After a better than expected NY and Philly Fed, we see upside risks. The US Q1 GDP (final) is expected to show a limited upward revision from 0.8% Q/Q annualized to 1.0% Q/Q annualized.

The EU leaders meet in Brussels for their regular meeting. Migration and labour markets are topics, but the main focus is Brexit, its consequences and the way exit negotiations will be hold. Various positions have been uttered in past days going from taking a hard line to treating the UK soft. Also the start of the negotiations will be a subject of talk even if formally the UK government has the key by deciding when to invoke article 50. The Summit starts today in late afternoon and finishes tomorrow.

Rates

US yield -1d2 0,6092 0,01575 1,011 -0,017610 1,4562 -0,056030 2,2679 -0,0944

DE yield -1d2 -0,6190 0,01805 -0,5400 -0,012010 -0,1072 -0,025630 0,3992 -0,0337

Bund (black) & EuroStoxx (orange): Typical risk-off trading pattern

German 2-to-30-year spread narrows sharply after Brexit, but trend was already down.

Tuesday, 28 June 2016

P. 3

S&P and Fitch cut UK credit rating

Rating agencies S&P and Fitch downgraded the UK’s rating following the outcome of the EU-referendum. S&P stripped the UK of the top-notch AAA rating and downgraded the country by two notches to AA with a negative outlook. The vote to leave the EU threatens the country’s constitutional and economic integrity. Rating firm Fitch cut the UK by one notch from AA+ to AA, also with a negative outlook. The period of uncertainty ahead would lead to an abrupt slowdown in growth, according to Fitch. Last Friday, rating agency Moody’s kept the Aa1 rating of the UK unchanged, but put it on negative outlook. S&P pre-announced a rating downgrade on Friday and the effective announcement didn’t additionally hurt risk sentiment. Fitch’s downgrade occurred after US market closure, but won’t impact markets either.

Fragile risk environment supportive for bonds

Overnight, Asian equities slightly higher after a negative opening. Sterling takes a breather after two days of heavy losses and other risk barometers like USD/JPY, the gold price or the US Note future also suggest some improvement in sentiment. However, we won’t take this for granted in the current fragile environment.

Today’s eco calendar contains the final revision of Q1 GDP, US consumer confidence and Richmond Fed Manufacturing index. In light of recent events, we don’t expect eco data to impact markets. The ECB forum in Sintra starts, but is beheaded with the cancellations of Fed chairwoman Yellen and BoE governor Carney. Comments by Draghi could nevertheless be interesting. Markets may have ears for a soft tone. In the wake of the Brexit-vote, we expect more volatility and risk aversion cross markets though, looking for a new equilibrium. Yesterday, the S&P 500 dropped below the neckline of a double top. Core bonds should remain underpinned, flattening the curves, but following two days of heavy gains, the up-leg could slow.

The next rate hike by the Fed is now only discounted by mid-2018, with a 10% market implied probability of a rate cut in July. Technically, we expect the US 10-yr yield to test the all-time low (1.38%). On intra-EMU bond markets, we expect some respite and calm to return after the sharp spread widening on Friday and with key resistances reached. Fundamentals weaken, but ECB buying and the search for yield should compensate.

R2 170 -1dR1 168,86BUND 166,71 0,3900S1 165,68S2 163,61

German Bund: fragile risk environment should continue to support Bunds

US Note future : more gains in the wake of Brexit as markets believe that the Fed will hold its fire for two more years.

US-Ge

Tuesday, 28 June 2016

P. 4

Euro remains in the defensive after Brexit

On Monday, the post-Brexit risk-off trade on European markets simply continued. The uncertainty on the economic consequences of Brexit remains high and there is hardly any visibility on the divorce process going forward. The risk-off trade was in the first place visible in a further decline of core bond yields and a new down-leg on the equity markets. Sterling remained also under pressure, while the impact on EUR/USD and USD/JPY was modest. EUR/USD closed the session at 1.1025 (from 1.1117 Friday). USD/JPY finished the session at 112.00 from 112.20. For now, the dollar and the yen almost equally serve the function of safe haven in the currency market.

Overnight, Asian markets show again a mixed picture. Japan records limited gains, probably as USD/JPY trades relatively stable. Regional indices are also supported by headlines that Korea and Japan are preparing fiscal stimulus. In theory this might also be slightly supportive for the currencies of those countries. Commodities are also better bid. The Aussie dollar regains some ground after the setback of the previous two days. AUD/USD is changing hands just below 0.74. EUR/USD trades in the 1.1060 area. EUR/USD rebounded off yesterday’s levels near 1.10 on signs that global tensions might ease.

Today, there are some second tier eco data in Europe. In the US, the final Q1 GDP, the CS house prices and the Consumer confidence will be published. If global tension ease a bit, especially the USD consumer confidence might have some intraday impact on currency trading. We see downside risks for the consumer confidence. However, the focus of global trading will remain on fall-out of the Brexit crisis. In this respect, markets will keep a close eye at the summit of EU leaders in Brussels. The ‘official’ debate on the consequences of Brexit and on the process to manage the UK-EU divorce will take place after the close of the European markets and tomorrow. The comments from EU and UK officials of late suggest that it could take quite some time even to start the process and to agree on the procedure. A lengthy, somewhat erratic way of going forward risks to cement the global sentiment on uncertainty markets don’t like. In such a scenario, pockets of risk-off might resurface regularly. These are probably negative for the euro and slightly positive for USD and JPY.

Currencies

R2 1,1428 -1dR1 1,1189EUR/USD 1,10555 0,0014S1 1,0913S2 1,0822

EUR/USD and USD/JPY stabilize after initial sell-off on Friday morning

EUR/USD stabilizes in the 1.10 area

USD/JPY: yen holding strong as Japanese authorities monitor FX

markets

Tion

Asian equity markets look for a short-term equilibrium

USD/JPY stabilizes near 102

EUR/USD rebounds slightly off yesterday’s levels near 1.10

Eco data will probably remain of second tier importance

The post-Brexit-sell-off might ease temporary

However, we don ‘t expect a sustained risk-on rebound off EUR/USD and USD/JPY.

Tuesday, 28 June 2016

P. 5

This morning, it looks like tensions in the European and US markets might ease a bit after the two-day sell-off. This might temporary support EUR/USD and USD/JPY. However, we assume that the upticks will be modest and short-lived as the visibility on where the Brexit process will go remains very low.

After the Brexit-vote, we retained the view that EUR/USD probably entered a sell-on uptick market until the risk-off repositioning enters calmer waters. We hold on to that view. The first shock of the aggressive repositioning might be over, but new pockets of uncertainty might pop up. So we maintain our sell on upticks strategy. On the topside, Friday’s intraday top (1.1189) is a first short-term reference. A break above this level could be a confirmation that the first, aggressive repositioning is running out of steam. Short-term we think that level might already be rather tough resistance. First support comes in at 1.0913 (Friday low) and 1.0822 (March correction low). The context remains intrinsically positive for the yen, but we have the impression that markets are reluctant to push USD/JPY aggressively below 100 as they feel uncomfortable with the risk of Japanese (or even coordinated) action.

Sterling remains in the defensive

Yesterday, UK Fin Min Osborne acknowledged that the UK will have to adjust to post Brexit situation and that market might stay volatile. On the other hand, he said that the UK economy was as strong enough to address the challenges it faces. Sterling rebounded temporarily, but mid-morning a new sterling selling wave kicked in. Cable set a new three-decade low below 1.32. EUR/GBP also set a new post-Brexit top. Later on, the sterling sell-off eased even as S&P and Fitch downgraded the UK Credit rating.. Cable closed the session at 1.3235 (from 1.3679). EUR/GBP finished the session at 0.8337 (from 0.8127).

Overnight, sterling rebounds marginally as tensions on Asian markets ease slightly. Later today, the CBI Retail sales data will be published. Of late, the UK data were constructive going into the Brexit vote. It is unlikely that good data from before the Brexit vote will have any (positive) impact on sterling. The focus will be on the talks between the UK and the EU at the EU summit. For now, uncertainty will remain high and that there is no roadmap yet to manage Brexit. Temporary upticks of sterling are possible, we think they are no sustainable yet.

Short-term, sterling likely entered a sell-on-upticks pattern until global markets find a new short-term equilibrium. We don’t anticipated BoE interventions to support sterling. The Bank will probably accept this first repositioning and will only step in if the decline of sterling continues in a disorderly way from current ‘reset’ levels. We think that the BOE will primarily try to address a potential negative impact on growth rather than defend the currency to prevent a temporary spike in inflation. In this context there is no reason to try to catch the falling sterling-knife.

R2 0,85 -1dR1 0,838EUR/GBP 0,8321 0,0108S1 0,7994S2 0,7717

EUR/GBP jumps on Brexit vote

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

Tuesday, 28 June 2016

P. 6

Tuesday, 28 June Consensus Previous US 14:30 GDP Annualized QoQ (1Q T) 1.0% 0.8% 14:30 GDP Price Index (1Q T) 0.6% 0.6% 14:30 Core PCE QoQ (1Q T) 2.1% 2.1% 15:00 S&P/CS 20 City MoM YoY SA (Apr) 0.58%/5.4% 0.85%/5.4% 16:00 Consumer Confidence Index (Jun) 93.5 92.6 16:00 Richmond Fed Manufact. Index (Jun) 3 -1 UK 12:00 CBI Retailing Reported Sales (Jun) -- 7 12:00 CBI Distributive Trades Survey - Reported Sales (Jun) -- 19 Germany 08:00 Import Price Index MoM YoY (May) A0.9%/-5.5% -0.1%/ -6.6% France 08:45 Consumer Confidence (Jun) 97 98 Italy 10:00 Consumer Confidence Index (Jun) 112.5 112.7 10:00 Manufacturing Confidence (Jun) 102.1 102.1 10:00 Economic Sentiment (Jun) -- 103.4 Spain 09:00 Retail Sales SA YoY (May) -- 4.1% Sweden 09:30 Trade Balance (May) -- 4.4b 09:30 Retail Sales MoM YoY (May) 0.7% / 3.2% 0.0% / 1.7% Events 28-29/06 EU Leaders Hold Summit in Brussels 10:00 ECB President Draghi speaks in Sintra, Portugal 10:00 EU Parliament to Vote on Resolution on UK Referendum 10:30 ECB Executive Board Member Coeure Chairs Panel in Sintra 13:00 ECB Board Member Praet Chairs Panel in Sintra

Calendar

Tuesday, 28 June 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 1,46 -0,05 US 0,61 0,02 DOW 17140 17140,24DE -0,11 -0,02 DE -0,65 -0,01 NASDAQ for Exch - NQI #VALUE!BE 0,33 -0,05 BE -0,52 0,01 NIKKEI 15323 15323,14UK 0,95 -0,14 UK 0,14 -0,09 DAX 9268,66 9268,66JP -0,22 -0,03 JP -0,31 -0,02 DJ euro-50 2697 2697,44

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,336 -0,0133y -0,197 0,787 0,517 Euribor-1 -0,36 -0,01 Libor-1 USD 0,50 0,505y -0,081 0,963 0,597 Euribor-3 -0,28 -0,01 Libor-3 USD 0,55 0,5510y 0,389 1,318 0,989 Euribor-6 -0,18 -0,01 Libor-6 USD 0,66 0,66

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,106 0,0019 EUR/JPY 112,65 0,14 187,568 1317,2 47,86USD/JPY 101,88 -0,01 EUR/GBP 0,8327 0,0114 - 1d -1,12 -9,42 -0,80GBP/USD 1,3272 -0,0168 EUR/CHF 1,0798 0,0048AUD/USD 0,7398 -0,0016 EUR/SEK 9,4028 0,00USD/CAD 1,2993 -0,0043 EUR/NOK 9,4180 -0,01