Headlines. Thursday, 14 July Rates: BoE-induced uptick? Currencies: USD/JPY supported by Japan stimulus hope. Calendar

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1 Rates: BoE-induced uptick? We expect the BoE to cut its policy rates and keep an easing bias with risks for immediate further action. Such scenario should benefit UK gilts with spill over effects to Europe and the US. Simultaneously rising stock markets could cap bond gains. Additionally, we fear investors will eventually sell the uptick in line with the market reaction after recent ECB easing. Currencies: USD/JPY supported by Japan stimulus hope Yesterday, EUR/USD and USD/JPY held in well known territory as the risk rally slowed. Today, the focus will be on the BoE policy decision. BoE cutting the base rate by 25 bp and keeping the door open for more QE easing in August should be a negative scenario for sterling. Hope on aggressive fiscal stimulus in Japan is keeping the yen in the defensive. Calendar Headlines S&P Nikkei Oil CRB Gold 2 yr US 10 yr US 2 yr EMU 10 yr EMU EUR/USD USD/JPY EUR/GBP Eurostoxx50 US equities closed nearly unchanged after hovering in a tight range near alltime highs (S&P and Dow). The Asian equity rally shows signs of flagging as investors await new impetus. Japan bucks the trend and ekes out modest gains. Crude oil retreated sharply yesterday and fell to $46.26/barrel from $48.26/barrel previously as US inventories rose more than expected. It is overnight slightly higher. Philly Fed Harker said that two rate hikes may be needed in 2016 and rates should be 3% by the end of 2018, as Brexit would have little impact on the US economy and inflation may return to target next year. So, besides George also Harker might be in for a July rate hike. Nevertheless the voting majority still looks to delay a decision. Dallas Fed Kaplan said the May payrolls was an anomaly which the June report put into context. We ll have to debate the implications for that at the next meeting. He was inconclusive about the need for rate hikes in the near term South Korea left rates unchanged at 1.25%, but lowered its expectations for growth and inflation. The Korean won gained further ground versus the dollar. The Aussie dollar stabilized. Australian employment rose in June substantially more than expected, consumer inflation expectations rose to 3.7% (from 3.5%) and car sales recovered in June (+3.3% M/M and 2.1% Y/Y). UK PM May drew a line under the Cameron era, fired FM Osborne and named Boris Johnson as foreign secretary. The euro sceptic David Davis will lead the Brexit negotiations. P. 1

2 Rates Core bonds rebound as equity rally stalls Core bonds rebound Bull flattening after the bear steepening US yield 1d 2 0,6732 0, ,0536 0, ,4725 0, ,1796 0,0344 DE yield 1d 2 0,6720 0, ,5940 0, ,1392 0, ,4212 0,0581 Yesterday, global core bonds rose in lockstep with stocks during European dealings, ending the two day sharp correction lower. As the US trading session got going, equity gains melted away while especially German bonds kept strong. The eco calendar didn t influence trading with only outdated, disappointing EMU industrial production data and in line US import prices. Germany became the first euro zone country to auction 10 yr debt with a negative yield ( 0.05%). Investors tried to push the Bund lower on the outcome, but the absence of follow through selling was the start of the rally, helped by dropping oil prices too. US Treasuries underperformed, but a strong 30 yr Bond auction helped the bull flattening getting more traction. The Beige Book didn t bring firework. Compared to the June book, there was a marginal improvement in the economic situation. Now all districts reported growth versus all but one in June. Summarizing, the Book said the outlook was generally positive across broad segments of the economy including retail sales, manufacturing and real estate. Districts reporting on overall growth expect it to remain modes. In a daily perspective, the US and German curves bull flattened (following a corrective bear steepening) with US yields down between 2.3 (2 yr) and 5.2 (30 yr) bps. German yields fell 0.6 (2 yr) to 7.6 (30 yr) bps. On intra EMU bond markets, 10 yr peripheral yield spread changes versus Germany narrowed modestly if one takes the German 10 yr benchmark change into consideration. Surprisingly, semi core bonds outperformed peripherals. Today, BoE meeting main driver Unattractive eco calendar BoE meeting key driver Fed Lockhart speaks The euro area eco calendar is empty and the US initial claims and PPI probably won t impact trading. Fed speaker George has recently spoken (suggesting she ll again dissent in favour of rate hike), but Atlanta Fed Lockhart hasn t spoken for long. He is rather cautious and so should keep all options open. If anything, we think he might still be in favour of two hikes if Brexit hasn t much impact. Regarding the BoE, analysts are divided almost evenly between no change in rates and 25 bps rate cut. We suspect that those in favour of no cut are of the opinion that the BoE will wait till early August when the next meeting takes place and an inflation report is available. Two analysts go for a 40 bps cut to 0.10%, two for a 45 bps cut and two expect a cut to 0%. Markets discount a 80% chance of a 25 bps rate cut. We expect a 25 bps rate cut and follow through action, probably on QE, at the August meeting. Bund future (black) & EuroStoxx (orange) intraday: Rebound of Bund following a two day correction as equity rally stalls. UK 2 yr yield crashed post Brexit to about 0.10%. Today the BoE meets. Chances for a buy the rumour sell the fact. P. 2

3 R d R BUND 167,05 0,3900 S1 165,68 S2 163,61 Strong 30-yr US Bond auction The US Treasury ended its refinancing operation with a strong $12B 30 yr Bond auction. The auction stopped cleanly through the 1:00 PM bid side and the bid cover was quite good. Bidding details showed that indirect bidders, reflecting foreign investor demand, led strength in the auction while the direct bid and dealer bid were a little light. Today: BoE-induced uptick? Overnight, Asian equity indices trade marginally lower with Japan slightly outperforming. US equities eventually ended nearly unchanged near the alltime highs yesterday. The US Note future trades stable, suggesting a neutral opening for the Bund. Today s eco calendar contains only US weekly claims and PPI data, but these aren t expected to impact trading. The BoE s policy meeting will be most important for global risk sentiment. We expect the central bank to cut its policy rates and keep an easing bias (QE expansion in August?!) with risks for immediate further action. Such scenario should initially benefit UK gilts with spill over effects to Europe and the US. Simultaneously rising stock market could cap bond gains. Additionally, we fear that markets might eventually react in similar fashion as after most recent ECB policy easing notably a sell the fact (after a buy the rumour). Fed speakers include Lockhart (moderate) en George (hawk). The earnings season starts in earnest with JP Morgan results which is a wildcard for equities and thus for bonds too. The technical pictures of the Bund and US Note future remain bullish even as core bond markets are expensive. The picture would deteriorate to more neutral in case of breaks below (Bund) and (Note future). German Bund: Bullish technical picture remains intact. First support at US Note future: bounced off first support P. 3

4 Currencies USD/JPY takes a breather after recent rebound EUR/USD gains a few ticks, but stays in existing range R2 1,1428 1d R1 1,1189 EUR/USD 1,1113 0,0050 S1 1,0913 S2 1,0822 Japanese equity markets outperform USD/JPY maintains recent gains EUR/USD drifting marginally higher in technical trade BoE main driver markets Eco calendar unattractive EUR/USD marginally higher in the range?. More USD/JPY gains on expectation for further stimulus? USD/JPY nearing 105 barrier On Wednesday, the global risk on rally slowed, but most European equity indices held near the post Brexit top. This was not enough to give USD trading clear guidance. USD/JPY rebounded temporary after the Japanese government downgraded the 2016 growth/inflation forecasts, but USD/JPY returned lower in the 104 big figure. The pair closed the session at (from ). EUR/USD maintained its recent erratic trading pattern. The dollar lost slightly ground in late session as core bond yields declined e few basis points. EUR/USD closed the session at (from ). This morning, Asian equities are narrowly mixed. Japan outperforms on hopes of an extra government budget to support the economy. USD/JPY trades slightly stronger at Australian labour market data were OK. The Aussie dollar gained temporary a few ticks, but the gains could not be sustained. AUD/USD trades in the low 0.76 area. The Aussie dollar is holding strong after the recent rebound. In technical trade, EUR/USD is gaining marginally ground, supported by a decent bid in EUR/JPY. EUR/USD trades in the area. Today, no European data, while in the US, the jobless claims and the PPI will be published. The jobless claims are expected to go higher to , from a very low the previous week. Headline PPI is expected stable at 0.1% Y/Y. The core reading is forecast to decline from 1.2% Y/Y to 1.0% Y/Y. A substantial deviation from consensus is needed to trigger a FX move. USD traders will keep a close eye at the BoE policy decision. The BoE will probably ease its policy as several risks that were forecast before the referendum, are now likely to materialize. A BoE easing might also be slightly supportive for US and EMU bonds. From a currency point of view, we see such a scenario as slightly positive for USD/JPY (ongoing risk on) and at the same time also slightly supportive for EUR/USD. However, we don t expect the BoE action to be decisive for USD trading. USD traders will look forward to tomorrow s heavy calendar in the US (retail sales, CPI, ) and the earnings season. Will corporate earnings continue to support the risk rally? EUR/USD; gaining a few ticks, but within the established range USD/JPY: yen in the defensive as stimulus hope weighs P. 4

5 Until now, the global risk on context and even a strong US payrolls report didn t provide clear guidance for EUR/USD trading. The pair holds a tight range in the 1.10/1.11 area. For now, there is no trigger to change this pattern. At some point, uncertainty on the Brexit process and on other institutional factors might return to the forefront as a negative for the euro. After the Brexit vote, we assumed that EUR/USD would enter a sell on upticks market as new pockets of uncertainty might pop up. The post Brexit intraday top (1.1189) is a first short term tough resistance. First support comes in at (24 June low) and (March low). USD/JPY is well bid on the hope for more fiscal stimulus and for ongoing easy monetary conditions. USD/JPY made a nice rebound off the post Brexit lows. The pair cleared a first resistance at the Some further risk on gains are likely if the new stimulus package is substantial. 105/ is the next important resistance. The prospect of more stimulus is yen negative, at least short term. For now, we don t row against the USD/JPY rebound. R2 0,8627 1d R1 0,8484 EUR/GBP 0,8403 0,0086 S1 0,83 S2 0,7994 BoE expected to support the economy post-brexit Earlier this week, sterling succeeded an impressive rebound driven by the global risk on sentiment and prospect of Theresa May becoming Prime minister as soon as today. Technical considerations (short squeeze in several cross rates including GBP/JPY) also played a role. These factors were more or less worked out yesterday. Risk sentiment remained positive, but it was not strong enough to inspire further sterling gains. Sterling set a minor correction top against the euro (EUR/GBP ) and the dollar (GBP/USD ) in Asia yesterday morning, but gradually lost a substantial part of Tuesday s impressive rebound. The formal nomination of Theresa May didn t have much impact on sterling trading. However, at the end of the day, sterling traded materially weaker compared to the opening levels. EUR/GBP closed the session at (from ). Cable finished the day at (from ). Today, the focus is on the BoE policy decision. Several options are possible. We favour a scenario of the BoE cutting the base rate by 25 bps. The BoE might keep the dollar open for further easing (more QE bond buying), but we expect that to be approved at the August meeting, when a new inflation report will be available. The BoE will give priority to supporting the economic growth, rather than meeting the inflation target or supporting sterling. This context should be negative for sterling. So, we maintain our sterling negative bias longer term, despite the technical rebound earlier this week. EUR/GBP is the next high profile resistance on the charts is a first important support. EUR/GBP: sterling rebounds halts ahead of the BoE decision GBP/USD: awaiting the BoE decision P. 5

6 Calendar Thursday, 14 July Consensus Previous US 14:30 Initial Jobless Claims 265k 254k 14:30 Continuing Claims 2130k 2124k 14:30 PPI Final Demand MoM / YoY (Jun) 0.3%/ 0.1% 0.4%/ 0.1% 14:30 PPI Ex Food and Energy MoM / YoY (Jun) 0.1%/1.0% 0.3%/1.2% 14:30 PPI Ex Food, Energy, Trade MoM / YoY (Jun) 0.1%/ 0.1%/0.8% Japan 06:00 Tokyo Condominium Sales YoY (Jun) A: 12.9% 14.1% UK 01:01 RICS House Price Balance (Jun) 0,1 0,19 13:00 Bank of England Bank Rate 0.25% 0.50% 13:00 BOE Asset Purchase Target (Jul) 375b 375b Events 00:00 Fed's Harker Speaks in Philadelphia 12:45: JP Morgan Chase & Co publishes Q2 earnings 17:15 Fed's Lockhart Speaks on Economy in Idaho 19:15 Fed's George Speaks on U.S. Economy in Oklahoma City P. 6

7 Contacts 10 year td 1d 2 year td 1d STOCKS 1d US 1,47 0,02 US 0,67 0,01 DOW ,12 DE 0,14 0,03 DE 0,67 0,00 NASDAQ or Exch NQI #VALUE! BE 0,18 0,03 BE 0,58 0,00 NIKKEI ,15 UK 0,74 0,07 UK 0,10 0,06 DAX 9930, ,71 JP 0,27 0,01 JP 0,36 0,00 DJ euro ,14 USD td 1d IRS EUR USD (3M) GBP EUR 1d 2d Eonia EUR 0,326 0,002 3y 0,235 0,885 0,491 Euribor 1 0,37 0,00 Libor 1 USD 0,45 0,45 5y 0,155 1,021 0,559 Euribor 3 0,30 0,00 Libor 3 USD 0,50 0,50 10y 0,285 1,331 0,854 Euribor 6 0,19 0,00 Libor 6 USD 0,59 0,59 Currencies 1d Currencies 1d Commoditie CRB GOLD BRENT EUR/USD 1,1113 0,0050 EUR/JPY 116,81 1,46 190, ,64 46,75 USD/JPY 105,12 0,83 EUR/GBP 0,8403 0,0086 1d 0,00 3,66 1,16 GBP/USD 1,3217 0,0077 EUR/CHF 1,0927 0,0003 AUD/USD 0,7612 0,0024 EUR/SEK 9,4269 0,03 USD/CAD 1,2943 0,0125 EUR/NOK 9,3300 0,02 Brussels Research (KBC) Global Sales Force Piet Lammens Brussels Peter Wuyts Corporate Desk Joke Mertens Institutional Desk Mathias van der Jeugt France Dublin Research London Austin Hughes Singapore Shawn Britton Prague Research (CSOB) Jan Cermak Prague Jan Bures Petr Baca Bratislava Research (CSOB) Marek Gabris Bratislava Budapest Research David Nemeth Budapest ALL OUR REPORTS ARE AVAILABLE ON 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. P. 7