Brent oil is holding under $45/ barrel after yet another decline during US trading hours yesterday.

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1 Thursday, 22 June 2017 Rates: Core bonds remain resilient, partly because of oil sell-off Risk sentiment and oil prices could guide global trading. Core bonds can profit in a daily perspective if oil extends losses, but moves are expected to remain within narrow technical ranges. The technical picture for Brent deteriorated following the break below $46/barrel. The eco calendar only contains second tier eco data. Currencies: Oil price and low core yields weigh on dollar There is little eco news to guide USD trading this week and this won t change today. The decline of the oil prices keeps LT yields low and weighs slightly on the dollar. Sterling rebounded temporary on hawkish comments from BoE Haldane, but a test of the EUR/GBP /66 resistance is still possible. Calendar Headlines S&P Eurostoxx 50 Nikkei Oil CRB Gold 2 yr US 10 yr US 2yr DE 10 yr DE EUR/USD USD/JPY EUR/GBP The S&P and Dow Jones performed weak yesterday, amongst others due to falling oil prices. Nasdaq was a clear outperformer, gaining 0.74%. In Asian markets, equity gains are modest overall. Brent oil is holding under $45/ barrel after yet another decline during US trading hours yesterday. The New Zealand Reserve Bank kept its interest rates unchanged at 1.75%. Markets interpret the NZRB statement slightly less dovish. This resulted in small gains for the Kiwi dollar versus the US dollar. Fed policymaker Harker said he prefers pausing rates while reducing the bank s balance sheet. He also stated that, despite low wage growth, there is very little slack left in the jobs market and wage acceleration will soon start. Senate Republicans plan to release a new health-care bill that would curtail federal Medicaid funding, repeal taxes on the wealthy and eliminate funding for Planned Parenthood as part of an effort to undo Obamacare. PM May will outline her approach to reassuring EU expatriates about their futures in the UK. The UK stance will likely disappoint EU-members as May faces a tough balancing act between the EU-wishes and the euro-sceptics at home. The eco-calendar contains mainly second tier releases like US jobless claims, UK CBI total orders, the Norvegian rate decision and EMU consumer confidence. In terms of events, the EU summit and Fed speaker Powell might be interesting. P. 1

2 Rates Thursday, 22 June 2017 UK Gilts pull Bunds and US Treasuries lower Core bonds slightly lower, again triggered by UK gilts moves Peripheral spreads little changed Global core bond trading showed two faces yesterday. Initial European equity market weakness and a dip of Brent crude provided a safe haven bid for German Bunds and US Treasuries, that didn t affect the European shorter end though. The minor upward bias remained in place until comments of BoE chief economist Haldane. He advocated a rate hike later this year and joins the growing hawkish wing inside the Bank of England. UK Gilts suffered a significant blow and pulled German Bunds (inclusively now the short end of the curve) and US Treasuries lower in absence of eco data or other news. The UK yield bear flattened with the 2-yr yield up testing the 2017 high around 0.2%. US yield -1d 2 1,35 0,00 5 1,76 0, ,16 0, ,72-0,01 DE yield -1d 2-0,63 0,02 5-0,38 0, ,27 0, ,05-0,02 In a daily perspective, changes on the German yield curve ranged between +2.4 bps (30-yr) and -1.8 bps (30-yr). The outperformance of the very long end of the curve was partly supply-related and partly oil-related. Changes on the US yield curve varied between +1 bps (2-yr) and -1.1 bp (30-yr). On intra-emu bond markets, 10-yr yield spread changes versus Germany were slightly higher with Portugal underperforming (+7 bps). Philly Fed Harker rejected criticism on last week s rate hike in the face of low inflation and fallen oil prices. More importantly, he advocated policymakers to pause on rates in the coming months, while they start tapering their balance sheet, possibly in September. He stressed the importance of tapering above the increase of rates. There may possibly be one more rate increase this year, he added. One scenario would see the Fed starting tapering before hiking rates again. In that case, he would advocate a pause in hiking rates and see how markets react. He firmly stands by the Phillips curve and expects wages to go up pretty soon. Harker is a moderate hawk inside the FOMC. In his view tapering might start in September and maybe prevent another rate hike this year. Another scenario we think is hiking in September and taper in December, if inflation shows signs of life. Bund (orange) & Eurostoxx (black): two defining moments for bonds: First equity weakness, second: Haldane comments Brent oil: Slide continues as shy attempt to rise on inventories is met by selling. Eco calendar well filled, but still with second tier data EMU consumer confidence to remain strong EMU June consumer confidence, the first indicator for the month, is expected to have improved further (-3 from -3.3) which would be the best result since the previous peak in mid We have no reasons to distance us from consensus. The labour market improves, spending capacity increases and equity markets do well. French National business confidence is expected to have increased slightly (105 from 104), but the headline index flat-lined since last December. P. 2

3 It s difficult to see a Macron effect. The index stays nevertheless well above its long term average. US initial jobless claims are expected slightly higher after a big fall in the previous week. Claims remain near decades lows though. The EU Summit of leaders starts, but no market moving decisions are expected. If some unity on migration, security and the economy comes out of it, the improving European sentiment would get another boost. Core bonds remain resilient R2 165,93-1d R1 165,55 BUND 164,97 0,05 S1 161,68 S2 160,17 Overnight, most Asian stock markets gain modest ground with China outperforming (+1%). The US Note future has a small upward bias while Brent crude hovers near the multi-month lows (<$45/barrel). We expect a neutral opening for the Bund. Today s eco calendar contains US weekly jobless claims and EMU consumer confidence, but we don t think they ll be able to colour trading. Both indicators will nevertheless remain near very strong levels. Fed governor Powell s speech is a wildcard, but the topic is regulation so he ll probably won t touch on monetary policy. Risk sentiment and oil prices could guide global trading. Core bonds can profit in a daily perspective if oil extends losses, but moves are expected to remain within narrow technical ranges. The technical picture for Brent deteriorated following the break below $46/barrel. US yields are above (5yr), near (10y) and below (30y) key support levels even as the Fed held on to the blueprint of its future tightening cycle last week. If support levels in US yield terms hold, we recommend a cautious sell-on-upticks strategy. Our basis assumption remains that the long term rally of core bonds is over as policy normalisation slowly starts (ECB) or accelerates (Fed). A declining oil price is via declining inflation expectations a risk for our view. German Bund: Hard time getting away from recent highs US Note future: US markets remain doubtful about the Fed s tightening intentions P. 3

4 Currencies Oil price decline weighs on USD Dollar l captured in technical trade. Yen Asian extends equities correction extend rebound as BOJ keeps policy unchanged Dollar doesn t profit from lower oil price R2 1,1428-1d R1 1,13 EUR/USD 1,1168 0,0034 S1 1,0839 S2 1,0778 Eco data second tier for FX trading Oil price decline slightly USD negative Yesterday, there was nothing to inspire USD trading. EUR/USD was locked in the mid 1.11 area for most of the day. An uptick in core bond yields supported a temporary USD/JPY comeback, but the USD gain could not be sustained. USD/JPY finished the session at (from ). EUR/USD closed an uneventful session at (from ). Overnight, risk sentiment in Asia remains constructive. The tech sector rebound outweighs the impact of a decline of the oil price. Brent oil is holding below the $45/barrel level. USD/JPY trades with a slightly negative bias. The dollar also trades marginally softer against the euro (EUR/USD area). The Reserve bank of New Zealand, as expected, left its policy rate unchanged at 1.75%. The RBNZ maintained a positive economic outlook. It also wasn t worried about the recent rise of the kiwi dollar. NZD/USD strengthened to currently trade in the area. The eco calendar is again only little interesting. In EMU, consumer confidence is expected to improve slightly further. In the US, the jobless claims and some second tier data will be published. The data might have some intraday significance for the dollar at best, but won t set a clear directional trend. The decline in oil prices and the equity performance remain wildcards. The usual inverse correlation between the dollar and oil currently doesn t work. Sometimes this turns out to be USD negative as well. USD/JPY is currently more sensitive to the low level of core interest rates rather than to the swings in the equities. In this context, a further decline of oil might continue to weigh on USD/JPY. The impact on EUR/USD is less obvious. We maintain a neutral stance on EUR/USD today. Global context. After last week s relatively hawkish Fed statement, the topside in EUR/USD is better protected and a cautious sell-on upticks approach is advised. However, sustained USD gains need better US eco data, supportive Fed comments and/or higher US yields. With few high profile US data this week, it is doubtful that the US currency will receive this support. If the equity rally slows, so might be the USD rebound. Oil is also a wildcard. EUR/USD: test off /66 resistance rejected, but correction remains modest. First support at holds USD/JPY: post-fed rebound slows as oil and low US yields weigh P. 4

5 Technical picture Thursday, 22 June 2017 The USD/JPY rally ran into resistance in early May. A mini sell-off mid-may made the short-term picture negative, driving the pair further down in the / range. The post-fed USD rebound pushed the pair beyond a first minor resistance at A break beyond the correction top would improve the ST-picture. The day-to-day sentiment improved slightly of late, but we remain cautious to forecast a U-turn. Early May, EUR/USD failed to break below the / support (gap). Poor US data and US political upheaval propelled EUR/USD north of the range top. The pair tested the area going into the FOMC decision, but the test was rejected. So the Trump top/correction top at / proved to be a solid resistance. USD sentiment will have to become really negative to clear this hurdle. EUR/USD is a first minor support. A return below would indicate that the upside momentum has eased. Sterling haunted by BoE comments R2 0,8881-1d R1 0,8866 EUR/GBP 0,8814-0,0002 S1 0,8383 S2 0,8314 Comments from BoE governors continue to haunt UK interest rate markets and sterling. On Tuesday sterling was hammered as BoE governor Carney said that it is too early for a rate hike. EUR/GBP yesterday even came within reach of the /66 key resistance. However, sterling fortunes changed again as BoE chief economist Haldane said that it could be prudent to withdraw some policy stimulation in the second half of the year. At last week s BoE meeting, Haldane was the in the camp of the MPC members who voted to leave rates unchanged. So, the division within the BoE is profound. The outcome of the next BoE meetings might be a close call. Sterling jumped sharply higher on the Haldane comments but returned part of the gains later. EUR/GBP closed the session at Cable finished the day at Today, the CBI Trends orders will be published. A modest decline (7 from 9) is expected. It is interesting to see whether the recent turmoil might affect the economy going forward. However, the CBI data are usually no market mover. The political developments remain a wildcard. The interest debate with the BoE could in theory support sterling. However, at the end of the day, we still see no rate hike short-term as political and economic uncertainty remains really high. We maintain a sterling negative bias. From a technical point of view, EUR/GBP extensively tested the area (2017 top), but a real break didn t occur. BoE comments caused some intraday volatility recently. In the end, the /66 resistance remains within reach. A break would open the way to the 0.90 area. A return below the correction low would indicate easing pressure on sterling. Such a break lower will be difficult. A EUR/GBP buy-on-dips approach remains favoured. EUR/GBP: sterling rebounds temporary on BoE comments but the /66 resistance stays within reach t. GBP/USD decline slows (temporary) but no sustained rebound yet P. 5

6 Calendar Thursday, 22 June Consensus Previous US 14:30 Initial Jobless Claims 240k 237k 14:30 Continuing Claims 1928k 1935k 15:00 FHFA House Price Index MoM (Apr) 0.5% 0.6% 15:45 Bloomberg Economic Expectations (Jun) :00 Leading Index (May) 0.3% 0.3% 17:00 Kansas City Fed Manf. Activity (Jun) 9 8 Canada 14:30 Retail Sales/ Retail Sales Ex Auto MoM (Apr) 0.3%/0.7% 0.7%/-0.2% UK 12:00 CBI Trends Total Orders (Jun) :00 CBI Trends Selling Prices (Jun) EMU 16:00 Consumer Confidence (Jun A) France 08:45 Business Confidence (Jun) :45 Manufacturing Confidence (Jun) :45 Production Outlook Indicator (Jun) :45 Own-Company Production Outlook (Jun) Norway 10:00 Deposit Rates 0.5% 0.5% Events Japan Cabinet Office Monthly Economic Report for June EU Summit of leaders in Brussels (Migration, Security & Defence and economy) 10:00 ECB Publishes Economic Bulletin 16:00 Fed's Powell Speaks Before Senate Banking Committee (fostering eco growth: regulator perspective) 18:00 SNB's Maechler Speaks in Zurich 19:00 US to sell $5B 30-yr TIPS re-opening 20:00 BOE's Forbes speaks in London P. 6

7 10-year Close -1d 2-year td -1d Stocks Close -1d US 2,16 0,01 US 1,35 0,00 DOW 21410,03-57,11 DE 0,27 0,00 DE -0,63 0,02 NASDAQ 6233,953 45,92 BE 0,59 0,00 BE -0,55-0,01 NIKKEI 20110,51-28,28 UK 1,03 0,04 UK 0,21 0,08 DAX 12774,26-40,53 JP 0,06-0,01 JP -0,10 0,00 DJ euro ,35-6,31 IRS EUR USD GBP EUR -1d -2d USD -1d -2d 3y -0,09 1,65 0,64 Eonia -0,3620 0,0000 5y 0,14 1,83 0,78 Euribor-1-0,3730-0,0010 Libor-1 1,2156 0, y 0,72 2,13 1,11 Euribor-3-0,3290 0,0000 Libor-3 1,2872 0,0000 Euribor-6-0,2710 0,0000 Libor-6 1,4396 0,0000 Currencies Close -1d Currencies Close -1d Commodities Close -1d EUR/USD 1,1168 0,0034 EUR/JPY 124,39 0,29 CRB 167,42-2,23 USD/JPY 111,38-0,07 EUR/GBP 0,8814-0,0002 Gold 1245,80 2,30 GBP/USD 1,2671 0,0042 EUR/CHF 1,0861 0,0004 Brent 44,82-1,20 AUD/USD 0,7553-0,0027 EUR/SEK 9,7712-0,0078 USD/CAD 1,3334 0,0066 EUR/NOK 9,5259 0,0119 Contacts Brussels Research (KBC) Global Sales Force Piet Lammens Brussels Peter Wuyts Corporate Desk Mathias van der Jeugt Institutional Desk Dublin Research France Austin Hughes London Shawn Britton Singapore 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 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. P. 7