Tuesday, 04 July 2017

P. 1

Rates: Geopolitical tensions to give bonds some respite?

Strong US ISM aborted a sluggish corrective upturn during the US session with US Treasuries now underperforming Bunds. Geopolitical tensions may give Bunds some upside, but this might be temporary. Mind the technical pictures: red alert in the Bund and code orange for US Treasuries. Sell-on upticks preferred.

Currencies: Risk-off to set the tone for FX trading?

Yesterday, the dollar rebounded as investors anticipated good US eco data. Today, US markets are closed. Geopolitical tensions triggered a risk-off correction in Asia. Such a correction might cap the USD/JPY rebound. The impact on EUR/USD is less straightforward. A correction in EUR/JPY might weigh also weigh on EUR/USD.

Calendar

• US equities closed with modest gains for the S&P 500 with NASDAQ again

underperforming (-0.49%) on tech declines. Initially, Asian markets followed but sentiment turned as Asian stocks dropped on political tensions and losses in technology shares.

• President Jinping complained about a “negative” turn in China’s relationship with the US after several assertive US moves in Asia. Tensions are heating up in Asia as North Korea again fired a ballistic missile into the Sea Of Japan.

• The Reserve Bank of Australia is leaving its benchmark interest rate unchanged at 1.5%. There was little change in the RBA statement compared to previous months despite a general move of other central banks to more hawkish stances.

• The US manufacturing ISM was better than expected in June with a reading of 57.8 (55.3 consensus and 54.9 in May). Growth in production, employment and new orders indices point to a vibrant pace of activity in manufacturing.

• Multiple Nasdaq-listed stocks, including Amazon, Microsoft and Apple, saw their share price change to exactly $123.47 on multiple platforms. Nasdaq said this was due to “improper use of test data” sent to third party data providers.

• Bank of Canada governor Poloz expects inflation to be “well into an uptrend” in 2018 as the output gap in the economy closes. He added that the BoC should not wait to react until inflation hits the target otherwise it could be too late.

• With the 4th of July Holiday in the US, the eco-calendar is thin. The Swedish Riksbank rate decision and ECB’s Praet’s speech are the only interesting items on the agenda. The wildcard for today is the tension in international politics.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Tuesday, 04 July 2017

P. 2

Strong US ISM now hit US Treasuries badly.

After a savage sell-off last week, German bonds cautiously reversed course in technical trading during the morning session, but only after a shy test of the key Bund support at 161.68/58 (Bund opened at 161.55). The down-leg was exhausted or at least looked like it needed a pause. Ahead of the closure of US markets today, this was understandable. The German 10-yr yield virtually touched the key 0.5% yield resistance. The upturn in German bonds wasn’t because of bad news, as the final PMI was revised marginally higher and the unemployment rate was in line with expectations. The corrective movement was visible in other markets too. However, a very strong US ISM business survey (see headlines) bought out the bears once more and pushed bonds lower. US Treasuries, as expected, took the lead and underperformed German bonds, re-widened the yield spreads.

In a daily perspective, the German yield curve steepened with yields down up to 1.2 bp (2-yr) till the 5-yr and 1 to 2.4 bps higher in 10 and 30-yr tenors. The US yield curve shifted higher with yields up between 2.8 bps (2-yr) and 4.6 bps (10-yr). On intra-EMU bond markets, 10-yr yield spread are little changed with the exception of Italy/Portugal/Spain, whose spreads narrowed 2 to 3 bps.

US markets closed for 4th of July holiday

The market calendar is thin and may turn out unattractive too. EMU eco data are limited to the PPI for May and the Spanish unemployment rate, no market movers. The small Austrian and the German IL 30-yr bond auctions are only relevant for their niches. The Riksbank meets and some interesting comments may follow, but the only wildcard for global trading is the appearance of ECB-chief economist Peter Praet, who will participate in a panel discussion at a fixed income conference. The news article based on three ECB sources that said the market had misunderstood the (dovish) words of Mario Draghi last Tuesday didn’t carry far. Will Praet, the lieutenant of Draghi, once more try to turn the bearish bond sentiment by stressing the dovish part of Mario Draghi’s speech (abundant accommodative is still needed, persistent policy etc…)?

Rates

US yield -1d2 1.41 0.035 1.93 0.0410 2.35 0.0530 2.87 0.03

DE yield -1d2 -0.59 -0.025 -0.23 -0.0110 0.48 0.0130 1.28 0.02

T-Note future (black) and S&P future (orange): Strong ISM drag T-Note lower. Later on, equities come off their best levels

5yr/5yr inflation swap: Stronger and oil data is moving expectations again higher

Steepening US curve after ISM prints stronger

Bunds little changed but still near key support

Peripherals; slight narrowing

Will Praet try to turn the bearish bond sentiment?

Tuesday, 04 July 2017

P. 3

Geopolitical risk-off temporary respite for core bonds?

Asian equities opened well, but trade in the red now and losses are deepening. Another N-Korean missile and pressure of mainland China on Hong Kong during festivities in HK could be the driving forces. The yen is stronger than the dollar, which in turn is stronger than the euro. The T-Note gains ground. This sets the stage for a stronger Bund opening too.

Regarding bond trading, with the US markets closed and the EMU eco calendar razor-thin, we see sentiment driving the price action with ECB Peter Praet’s speech a wildcard (see higher). Due to geopolitical tensions (N-Korea), the core bonds may gain on safe haven flows. However, such tensions usually don’t affect markets for several days. So, it might just trigger a corrective move in the bond markets.

We hold our sell-on-upticks strategy as markets reposition for a new stage in the global monetary cycle: policy normalisation. The peak of central bank dovishness is behind us. Later this week though, we see strong labour market data and possibly hawkish FOMC Minutes. That should be another opportunity for US Treasuries to test the downside, as markets are still far away from the Fed’s view on future rates (dots). There is still some scope before key US support looms (see graph). This is different for the Bund, which arrived at key support levels (see graph below) and 0.50% 10-yr yield resistance. Such key technical levels are not easy to take out in a first attempt. Therefore, we still prefer a sell-on-upticks strategy. Should the break occur, repositioning may get on another leg with strong stop-loss selling.

R2 165.93 -1dR1 165.55BUND 161.97 -0.22S1 161.68S2 160.17

German Bund: Sell-off pushed the Bund for a first test of the 161.68 support (neckline double top) & 161.58 (62% retracement). While Bund closed a few ticks lower, we don’t see it yet as a clean break.

US Note future: More cracks in technical picture. Uptrendline is broken, while target small double top formation and 38% retracement are reached. Key support though at 124-12+.

Tuesday, 04 July 2017

P. 4

EUR/USD correcting off last week’s top.

USD/JPY: rebound to slow due to risk-off sentiment?

Risk-off correction to drive FX trading today?

The dollar made a cautious comeback at the start of the week as investors prepared for key US data to be released this week. Interest rate differentials also (re)widened slightly in favour of the US currency. EUR/USD returned below the 1.14 handle. USD/JPY regained the 113 barrier. The EMU eco data were strong, but the euro didn’t profit. Later, the US manufacturing ISM printed a strong 57.8, but didn’t cause any significant additional USD gains as US markets headed into an early close. EUR/USD finished the session at 1.1364 (from 1.1426). USD/JPY extended its uptrend to close the day at 113.38 (from 112.3).

Overnight, sentiment on Asian equity market deteriorated during the session. Especially Hong Kong stocks are hit hard. A new missile test from North Korea played a role. Tech stocks also remain under pressure. The yen profits slightly from the intraday equity decline. USD/JPY is drifting back to the 113 area. EUR/USD is also losing a few ticks and trades in the 1.1345/50 area (EUR/JPY driven?). The Reserve Bank of Australia left its policy rate unchanged at 1.5%. The RBA maintains a constructive view on the economy but wage growth remains low. The RBA didn’t hint at a change in its policy bias, disappointing hawks. AUD/USD dropped from the 0.7680 area to the 0.7620 area.

Today, there are only second tier eco data in Europe and US markets are closed for the 4th of July National Holiday. In such a context, one expects directionless trading in thin markets. This might still be the case, but we keep an eye on equities after the intraday sell-off in Asia. Will the correction in tech stocks spread to other parts of the market. Will political tensions (North Korean, reaction of Trump/discord between the US and China) cause additional volatility going into this weekend’s G20 meeting? Of late, politics seldom was a lasting issue for global markets’ trading. Even so, we keep an eye on it. Yesterday, the dollar was well bid as investors anticipated good US eco data this week. However, if sentiment on risk deteriorates, this picture might change. A risk-off correction might cap the recent USD/JPY rebound. Remarkably, EUR/USD declined this morning despite the risk-off sentiment. After the recent EUR/JPY rally, time might be ripe for a correction in this cross-rate. This could cap the upside in EUR/USD. More still, it could weigh on this cross-rate in case of a temporary risk-off.

Currencies

R2 1.1616 -1dR1 1.15EUR/USD 1.1365 -0.0061S1 1.0839S2 1.0778

Dollar rebound at the start of the week as investors adapted positions for upcoming key eco data.

Eco calendar is thin today

Will markets shift into risk-off modus?

USD/JPY and EUR/JPY to correct lower?

Sentiment on risk deteriorates during Asian session

USDJPY returns to 113

Aussie dollar declines after RBA leaves policy unchanged.

Tuesday, 04 July 2017

P. 5

Technical picture: USD looking for a bottom

A combination of hawkish ECB comments and weaker US eco data pushed EUR/USD last week above the 1.1300/66 resistance area with a new high at 1.1448. The next resistance is now the 1.15 area. Further out LT-correction tops are coming in at 1.1616/1.1714. A break would end the long consolidation period that followed the sharp decline of EUR/USD in 2014/early 2015. Such a key area will be difficult to break for now. A drop below 1.1119 would suggest the pair enters calmer waters.

The USD/JPY rally ran into resistance in early May and the pair returned lower in the 108.13/114.37 range. The post-Fed USD rebound pushed the pair the 112.13 correction top early last week, but follow-through gains were modest. So, the jury is still out. A sustained break would improve the ST-picture. Even so, were remain cautious on further USD/JPY gains.

Sterling declines against dollar; stable against euro.

Yesterday, the sterling trading was driven by the price moves in the dollar and the euro. The overall rebound of the dollar pushed cable back below the 1.30 barrier. There was also a small fall-out from the EUR/USD decline on EUR/GBP. The UK manufacturing PMI unexpectedly declined to 54.3 from 56.3. Sterling lost only modest ground after the release. EUR/GBP closed session at 0.8882 (from 0.8771). Cable finished the day at 1.2940.

Today, the UK construction PMI is expected decline slightly from 56.0 to 55.0. We see slight downside risks. The reaction of sterling to the release is likely limited. The Brexit negotiations are on ongoing issue. A risk-off sentiment, if it would occur, most often is a slightly negative for sterling. Short-term, we see EUR/GBP staying below the key resistance of 0.8866/80 as markets still digest the recent decline of sterling/rise of EUR/GBP. Cable’s fate will depend on EUR/USD.

From a technical point of view, EUR/GBP set a minor top north of the 0.8854/66 resistance (2017 top). A sustained break didn’t occur, causing a correction on the recent EUR/GBP rebound. A return below the 0.8655 correction low would indicate easing pressure on sterling. Such a break lower will be difficult. A EUR/GBP buy-on-dips approach remains favoured.

R2 0.9142 -1dR1 0.8881EUR/GBP 0.8782 0.0011S1 0.8383S2 0.8314

EUR/GBP topside test rejected. A modes/temporary sterling comeback

might be on the cards

GBP/USD topside test rejected on USD rebound

Tuesday, 04 July 2017

P. 6

Tuesday, 4 July Consensus Previous Australia 06:30 RBA Cash Rate Target A 1.50% 1.50% Canada 15:30 Market manufacturing PMI 55.1 UK 10:30 Markit/CIPS UK Construction PMI (Jun) 55.0 56.0 EMU 11:00 PPI MoM / YoY (May) -0.2%/3.5% 0.0%/4.3% Spain 09:00 Unemployment MoM Net ('000s) (Jun) -120.0 -111.9 Sweden 09:30 Riksbank Interest Rate decision -0.500% -0.500% Events US markets closed for Independence Day 11:30 Austria to sell 0.5% 2027 & 1.5% 2047 RAGB 11:30 Germany to Sell €0.5B 0.5% I/L 2030 Bonds 14:30 ECB's Praet takes part in panel discussion on fixed income conference 18:30 ECB's Nowotny Speaks in Vienna on eco considerations of ECB policy & discussion

10-year Close -1d 2-year td -1d Stocks Close -1dUS 2.35 0.05 US 1.41 0.03 DOW 21479.27 129.64DE 0.48 0.01 DE -0.59 -0.02 NASDAQ 6110.06 -30.36BE 0.81 0.01 BE -0.46 0.01 NIKKEI 20032.35 -23.45UK 1.26 0.01 UK 0.34 -0.02 DAX 12475.31 150.19

JP 0.09 0.00 JP -0.12 0.00 DJ euro-50 3491.81 49.93

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y 0.00 1.78 0.79 Eonia -0.3560 -0.00605y 0.27 1.99 0.97 Euribor-1 -0.3730 0.0000 Libor-1 1.2239 0.000010y 0.91 2.32 1.33 Euribor-3 -0.3310 0.0000 Libor-3 1.2992 0.0000

Euribor-6 -0.2710 0.0000 Libor-6 1.4477 0.0000

Currencies Close -1d Currencies Close -1d Commodities Close -1d

EUR/USD 1.1365 -0.0061 EUR/JPY 128.85 0.45 CRB 176.16 1.38USD/JPY 113.38 0.99 EUR/GBP 0.8782 0.0011 Gold 1219.20 -23.10GBP/USD 1.294 -0.0085 EUR/CHF 1.0951 0.0001 Brent 49.68 0.91AUD/USD 0.7661 -0.0028 EUR/SEK 9.6484 0.0162USD/CAD 1.3007 0.0043 EUR/NOK 9.5086 -0.0286

Calendar

Tuesday, 04 July 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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