Headlines. Wednesday, 22 June Rates: Consolidation into British EU-referendum? Currencies: dollar better bid going into the UK referendum

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1 Rates: Consolidation into British EU-referendum? Bonds showed some volatility yesterday, but no direction as eco news was second tier and ignored, Yellen and Draghi didn t break new ground and Brexit positioning slid into a lower gear. For today, similar directionless trading is likely ahead of tomorrow s Brexit referendum. Currencies: dollar better bid going into the UK referendum Yesterday; the dollar gained slightly ground as investors adjusted positions in the last straight line to the UK Brexit referendum. More wait-and-see trading might be on the cards today as there are no important data. The sterling rally slows as the Bretain momentum eased slightly and polls still suggest a neck and neck race. Calendar 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 US Equities ended slightly higher yesterday as Yellen failed to inspire markets. The S&P ended up by 0.27%, led by energy shares. This morning, most Asian shares trade in positive territory. Japanese stocks underperform as the yen trades slightly higher. In her testimony before Senate, US Fed Chairwoman Yellen said the chances of a recession this year are quite low despite mounting worries that the US could be heading towards a downturn after seven years of tepid economic growth. Yellen warned again that there is considerable uncertainty, failing to give any indication on the timing of a next rate hike. The latest polls released yesterday continued to suggest that the vote whether the UK will stay in the EU is being closely fought. A BBC poll after the Wembley Debate showed that the Leave camp won (39%/34%), which might give its campaign some extra momentum. Japan s Ministry of Finance views unilateral interventions as un unlikely tool in the event of a surge in the yen if the UK votes to leave the EU on Thursday, Bloomberg reports. Depending on the magnitude of any turmoil, an emergency BOJ meeting to step up monetary stimulus could be an option. Crude oil prices reversed its losses yesterday evening as API data showed that inventories dropped more than expected supported by stronger demand. The Brent crude oil price rose for a third straight session closing above $50.50/barrel, while the WTI ended just below $50/barrel. Today, the eco remains thin with only the US existing home sales and European Commission s consumer confidence. Fed Chairwoman Yellen will speak before the House Financial Services Panel. P. 1

2 Rates Calm returns on bond markets Core bonds little changed Peripheral spreads slightly wider. US yield -1d 2 0,7551 0, ,2106 0, ,6938 0, ,5014 0,0275 DE yield -1d 2-0,5760 0, ,4560 0, ,0683 0, ,6699 0,0175 Yesterday, calm returned on bond markets after the repositioning on the outcome of Brexit referendum of the last two trading days. Both the Bund and US Note future were little changed on the day. European equities eked out nice extra gains. In a daily perspective, the German yield curve barely changed. The shape of the US yield curve was little changed either with yield changes varying between +0.4 (30-yr) and +1.8 basis points (2-yr). On intra-emu bond markets, 10-yr peripheral yield spreads versus Germany widened slightly (1-3 bps) following a sharp narrowing of the yield spreads in the past sessions. The German Constitutional Court rejected a lawsuit against the ECB OMT programme, while the June German ZEW investor survey was better-thanexpected, but had no impact on trading. Brexit polls were mixed and all in all inconclusive, but helped Bunds recover from the morning losses. Soft Draghi comments supported Bunds. However later on, core bonds gave back the afternoon gains. Fed Yellen sounded dovish and likely sides those who see only one rate hike this year, but she couldn t support US Treasuries. The US 5-year Note auction went ugly and pushed US Treasuries somewhat further down in late trading and ahead of today s fresh supply. As the Yellen testimony came only days after her press conference and just before the Brexit referendum, we hadn t expected Yellen to break new ground which she didn t. However, in a number of minor aspects, her testimony was dovish and may have laid the groundwork for lowering the median FOMC rate projection to one instead of two hikes this year. We suspect she already pencilled in only one rate hike in her projections. After the meeting we concluded that likely 5 (or at least 4) of the 10 voting FOMC members were for one rate hike. She referred openly to the possibility of secular stagnation: We cannot rule out the possibility expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future. She worries also about some LT problems as weak productivity growth and low investment. US-Germa Bund future (black) & EuroStoxx (orange): Bund made intra-day gyrations but closed unchanged. Test of downside failed? Equities still made progress S&P consolidates near highs before Brexit. Thin eco calendar & second leg Yellen testimony Downside risks EU consumer confidence an US Existing Home sales The eco calendar remains rather thin with only US existing home sales and European Commission s consumer confidence. Fed Chairwoman Yellen will repeat her speech before the House. Following an improvement in the previous two months, European Commission s consumer confidence is expected to stabilize at - 7 in June, which is above the LT average of We believe that risks are on the P. 2

3 US-Ge downside due to Brexit uncertainties. In the US, existing home sales are forecast to have risen for a third straight month in May, by 1.8% M/M to a total of 5,55 million. Also here, we are more cautious and see risks for a downward surprise due to unfavourable weather and tight invent R2 166,63-1d R1 165,68 BUND 164,24-0,1700 S1 163,61 S2 162,12 Ugly US 5-yr Note auction, 5-yr Note up next The US $34B 5-yr Note auction was ugly. The auction stopped at 1.218%, well above the 1.205% last bid at the time of the auction. The bid/cover of 2.29 was the smallest in about 7 years and the buy-side takedown figures were light as well, actually the lowest since December The Treasury will finish its midmonth financing operation today with a $28B 7-year Note auction, a $5B 30- year TIPS re-opening and a 2-year Floating Rate Note. The German Finanzagentur taps the on the run 30-yr Bund ( 1B 2.5% Aug2046) for a small amount that shouldn t give much problems. This week s European auctions will be supported by a 3.75B 30-yr Bund redemption. Countdown to Brexit vote Overnight, most Asian stock markets are slightly higher, except for Japanese ones which show modest losses. The US T-Note future is virtually unchanged and so are many commodities. There was no market-related news overnight. So, we expect a neutral opening for the Bund. Today s eco calendar is thin. We see downside risks for EMU consumer confidence and US Existing Home sales, but these shouldn t impact markets as the Brexit referendum is now only one day away. The final big Brexit debate was won by the Leave camp according to a BBC poll. The US auctions are a question mark following weak 2- and 5-year auctions earlier this week. Most of the Brexit repositioning should have been done. In this context, we expect more consolidation in technically oriented sideways trading. Only interesting point, the US T-Note future test first support at /04+ (see graph). Longer term, if the UK stays in the EU, a September Fed hike could become topic of debate, though Yellen and markets (30% probability September move) indicate that US rates are in no hurry to go somewhere. The ECB will probably reassess its policy stance in September. The market probability of a rate cut is declining too and stands at 23.6% (22% for a 10 bps cut, 1.6% for a 20 bps cut). We see bonds retreating in case of a Remain, but probably only temporarily and modestly (1.90% for 10-yr US, 0.20 to 0.30% for the German 10-yr). In case of Brexit, core bonds should thrive well, while peripheral bonds should sell-off. German Bund (Sept. contract!!): Profit taking as risk sentiment improves US Note future (September contract!!): profit taking on extended rally and now test of first support P. 3

4 Currencies Dollar slighlty better bid going into the UK referendum EUR/UISD Dollar regains rebounds ground as even risk-off as Yellen trade eased speaks soft R2 1,1616-1d R1 1,1416 EUR/USD 1,1265-0,0027 S1 1,1131 S2 1,1058 Modest risk-on trade continues in Aisa Dollar remains well bid, especially against the euro. Today, the eco calendar is thin The dollar might attract some by default buying interest going into the UK referendum On Tuesday, FX and equity markets still positioned (a bit) for lower Brexit probability. Initially, the Bremain trade had no big impact on the major dollar cross rates. Later in the session, the dollar captured a better bid. The decline of EUR/USD was maybe partially due to soft comments from ECB s Draghi. On the other hand, the US currency didn t react to an equally soft tone from Fed s Yellen testimony. Remarkably, USD/JPY this time trended higher in the 104 big figure after it lagged the risk-on rally earlier this week. The pair closed the session at (from ). EUR/USD finished at (from ). Let s call it some by default USD buying as the Brexit campaign goes in itse last straight line. Overnight, Asian stocks outside Japan mostly trade with modest gains in a news poor session. Japan again slightly underperforms the region as USD/JPY declines to the mid 104 area. A Bloomberg article suggests that Japan is unlikely to start unilateral interventions in case of a Brexit outcome, as it looks for a G-7 coordinated action. However, will it get backing for it? At the same time, the dollar is holding near the recent highs against the euro with EUR/USD changing hands in the mid 1.12 area. Today, the eco calendar is very thin with only the US existing home sales and EU consumer confidence. Yellen will now testify before the House. We don t expect her to change her soft assessment as of yesterday. USD trading will probably be driven by the last jitters from the Brexit campaign. The latest polls again suggest a narrowing gap between leave and remain, easing some of the Bremain momentum that dominated earlier this week. More indications that the referendum will really be close call (or a return of the advantage to leave) would be supportive for the yen and the dollar and negative for the euro. However, most investors probably adapted positions to limit risks going into the UK referendum. In this context trading in the major currency cross rates could become rather erratic except for high profile last minute news. EUR/USD: dollar fighting back going into the UK referendum USD/JPY: off the recent lows, but no big leap higher yet Tion P. 4

5 In a broader perspective, we expect consolidation in EUR/USD, as markets assess the timing of the next Fed rate hike. Brexit is a wildcard for EUR/USD trading. Last week Brexit uncertainty was a negative for the euro. EUR/USD drifted lower in the established / trading band, but rebounded this week. We expect no clear trend until Brexit is completely out of the way. USD/JPY initially tested the key correction low but was hammered sharply last week as the BOJ left its policy unchanged. With the Fed rate hike path highly uncertain and global sentiment weakening, any rebound of USD/JPY should be short-lived. The break below is a high profile warning for USD/JPY longs. We don t row against the USD/JPY negative trend. R2 0,8117-1d R1 0,7994 EUR/GBP 0,7669-0,0090 S1 0,7692 S2 0,7565 Sterling positions adjusted before the referendum On Tuesday, sterling still traded with a positive bias during most of the session. Cable tested the correction top, but a sustained break didn t succeed. After the failed test, the pair returned lower in the range. Later in the session, the dollar gained slightly momentum pushing cable gradually lower in the range. A new poll in the afternoon, suggesting a narrowing gap between leave and remain might have been a slight sterling negative, too. EUR/GBP continued to trade with an overall negative bias. However, especially in the afternoon this was more due to euro weakness rather than sterling strength. EUR/GBP closed the session at (from ). Cable fished the day at (from ) and well of the intraday highs (1.4783). This looks very much like an indecisive picture for the UK currency. Today, the political debate and the latest polls set the tone for trading sterling trading today. Sterling is holding near yesterday s closing levels. We have the impression that the Bremain momentum of the previous days is again becoming a bit less convincing. As is the case for the major USD cross rates, we expect basically erratic, directionless trading in the major sterling cross rates. Headline risk probably make downside swings more likely rather than upside swings. That said, most investors should have adapted positions ahead of the referendum. EUR/GBP: sterling rebound and euro weakness GBP/USD: range top tested, but no sustained break P. 5

6 Calendar Wednesday, 22 June Consensus Previous US 13:00 MBA Mortgage Applications % 15:00 FHFA House Price Index MoM (Apr) 0.6% 0.7% 16:00 Existing Home Sales (May) 1.8%/5.55m 1.7%/5.45m Canada 14:30 Retail Sales MoM (Apr) 0.8% -1.0% 14:30 Retail Sales Ex Auto MoM (Apr) 0.7% -0.3% EMU 16:00 Consumer Confidence (Jun A) Norway 10:00 Unemployment Rate AKU (Apr) % Sweden 09:00 Consumer Confidence (Jun) :00 Manufacturing Confidence s.a. (Jun) :00 Economic Tendency Survey (Jun) :30 Unemployment Rate SA (May) 6.9% 6.7% Events 16:00 Fed Chair Yellen Speaks Before House Financial Services Panel Sweden Bond Auction (SEK3.5B 4.25% Mar2019) Germany Bund Auction ( 1B 2.5% Aug2046) US 2Yr FRN Auction ($13B) & 30Yr TIPS Auction ($5B) US 7Yr Notes Auction ($7B) P. 6

7 Contacts 10-year td - 1d 2 -year td - 1d STOCKS - 1d US 1,69 0,03 US 0,76 0,02 DOW ,73 DE 0,07 0,01 DE -0,58 0,01 NASDAQ for Exch - NQI #VALUE! BE 0,47 0,01 BE -0,51-0,01 NIKKEI ,72 UK 1,28 0,02 UK 0,50 0,03 DAX 10015, ,54 JP -0,14 0,00 JP -0,25 0,00 DJ euro ,34 USD td -1d IRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,335 0,006 3y -0,165 0,975 0,874 Euribor-1-0,36 0,00 Libor-1 USD 0,52 0,52 5y -0,034 1,163 1,010 Euribor-3-0,27 0,00 Libor-3 USD 0,59 0,59 10y 0,502 1,557 1,367 Euribor-6-0,16 0,00 Libor-6 USD 0,73 0,73 Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENT EUR/USD 1, ,0065 EUR/JPY 117,69-0,47 193, ,71 50,94 USD/JPY 104,5 0,18 EUR/GBP 0,7669-0,0038-1d 0,70-19,29 0,64 GBP/USD 1,4684-0,0015 EUR/CHF 1,0831-0,0055 AUD/USD 0,7468-0,0003 EUR/SEK 9,3102-0,02 USD/CAD 1,2784-0,0001 EUR/NOK 9,3485-0,03 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 non exhaustive information information is based on short-term is based forecasts on for expected short developments term forecasts on the financial for expected markets. KBC Bank developments 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