Wednesday, 29 June 2016 P. 1 Rates: Global corrective risk rebound, but limited losses for core bonds Core bonds held up well yesterday as a two-day risk-off hammering of riskier assets attracted bottom fishers. Asian equities trade up and European equities should start well too. However it barely weighs on core bonds. How long will the risk-on reaction last? Will riskier assets and core bonds continue to show a “positive” correlation? Peripherals to gain more? Currencies: Major USD cross rates hardly affected by risk-on rebound Yesterday, markets of risky assets rebounded, but this risk-on traded hardly filtered through into the currency market. Sterling rebounded, but the move was not really convincing. EUR/USD and USD/JPY also didn’t really profit. So, for now there is no clear guide for EUR/USD and USD/JPY trading. Calendar • US equities rebounded yesterday supported. The S&P rose 1.78% led by energy shares and financials. This morning, most Asian shares trade in positive territory too. Japanese stocks outperform on expectations for additional stimulus measures. • European leaders urged Britain to act quickly to resolve the political and economic confusion unleashed by its vote to leave the EU after the IMF said uncertainty could put pressure on global economic growth. Cameron said it will be for the next Prime Minister to determine the approach to take on negotiations. • ECB President Draghi told EU leaders yesterday that the UK’s decision to leave the EU could reduce EMU growth by a cumulative 0.3% to 0.5% compared with previous estimates over the next three years as growth would be reduced by a likely slowdown in Britain and by resulting slump in trade with the UK. • Coordinated attacks on passengers at Istanbul’s international airport killed at least 36 people. Islamic State is likely responsible for the killings said Turkish Prime Minister Binali Yildirim. • Following a two-day plunge, crude oil prices rebounded yesterday on the threat of union strikes in Norway and API data, which showed another drop in crude inventories. Currently, the Brent oil price hovers around $48.75/barrel, while the WTI trades just above $48/barrel. • Today, the eco calendar contains the first estimate of German HICP inflation for June, European Commission’s economic confidence and the US personal income and spending data. EU Leaders will continue their Summit and ECB President Draghi is scheduled to speak at the ECB conference. 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
Transcript
Wednesday, 29 June 2016
P. 1
Rates: Global corrective risk rebound, but limited losses for core bonds
Core bonds held up well yesterday as a two-day risk-off hammering of riskier assets attracted bottom fishers. Asian equities trade up and European equities should start well too. However it barely weighs on core bonds. How long will the risk-on reaction last? Will riskier assets and core bonds continue to show a “positive” correlation? Peripherals to gain more?
Currencies: Major USD cross rates hardly affected by risk-on rebound
Yesterday, markets of risky assets rebounded, but this risk-on traded hardly filtered through into the currency market. Sterling rebounded, but the move was not really convincing. EUR/USD and USD/JPY also didn’t really profit. So, for now there is no clear guide for EUR/USD and USD/JPY trading.
Calendar
• US equities rebounded yesterday supported. The S&P rose 1.78% led by energy
shares and financials. This morning, most Asian shares trade in positive territory too. Japanese stocks outperform on expectations for additional stimulus measures.
• European leaders urged Britain to act quickly to resolve the political and economic confusion unleashed by its vote to leave the EU after the IMF said uncertainty could put pressure on global economic growth. Cameron said it will be for the next Prime Minister to determine the approach to take on negotiations.
• ECB President Draghi told EU leaders yesterday that the UK’s decision to leave the EU could reduce EMU growth by a cumulative 0.3% to 0.5% compared with previous estimates over the next three years as growth would be reduced by a likely slowdown in Britain and by resulting slump in trade with the UK.
• Coordinated attacks on passengers at Istanbul’s international airport killed at least 36 people. Islamic State is likely responsible for the killings said Turkish Prime Minister Binali Yildirim.
• Following a two-day plunge, crude oil prices rebounded yesterday on the threat of union strikes in Norway and API data, which showed another drop in crude inventories. Currently, the Brent oil price hovers around $48.75/barrel, while the WTI trades just above $48/barrel.
• Today, the eco calendar contains the first estimate of German HICP inflation for June, European Commission’s economic confidence and the US personal income and spending data. EU Leaders will continue their Summit and ECB President Draghi is scheduled to speak at the ECB conference.
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
Wednesday, 29 June 2016
P. 2
Global corrective risk rebound, but limited losses
Equities, oil, peripheral bonds and other riskier assets profited from a corrective rebound yesterday after two days of heavy Brexit-induced losses. Global core bonds, which are at the other end of the risk spectre, suffered only marginal losses though. The core bond “correction” ended around European noon and even changed in some return action in the afternoon. A sprint higher of equities in late US trading barely affected US Treasuries. In a daily perspective, the US yield curve shifted 1 bp (30-yr) to 3 bps (10-yr) higher, the belly slightly underperforming the wings. Changes on the German yield curve were mixed with marginal declines at the front end (-0.7 to -1.1 bps) while yields increased by 0.4 bps (10-yr) to 4.7 bps (30-yr) further out on the curve.
The EMU eco calendar was empty while US eco data (final GDP revision, housing data, Richmond Fed and consumer confidence) were mixed and failed to trigger action. ECB Draghi didn’t comment directly on the UK referendum, but warned that the intensive usage of monetary policy measures had inevitably created destabilising spill-overs. To address these threats, he called on policymakers to engage in more coordination. In separate comments, ECB Draghi said that Brexit may lower EMU GDP by 0.5%-points.
On intra-EMU bond markets, peripheral bonds rallied sharply. Ten year yield spreads versus Germany narrowed 10 to 16 bps with Spain and Portugal outperforming. In the case of Spain, Fitch said that the Spanish election result should reduce the risk of a repeat of the political gridlock since the end of last year. Italian bank shares gained 6% to 8% today. Italian PM Renzi confirmed rumours about shoring up the Italian banking sector (see yesterday’s Sunset).
Today, the ECB conference continues and EU leaders will continue their two-day Summit without the UK PM Cameron, as leaders will talk about the EU in the post-Brexit area. The eco calendar is well filled. In Germany, HICP inflation is expected to have picked up in June with the consensus looking for an increase from 0.0% Y/Y to 0.2% Y/Y, with monthly prices up by 0.1% M/M as higher prices for leisure & entertainment and energy will be partly offset by lower prices for clothing and footwear (Summer sales). We see risks for an upward surprise. June EC’s economic confidence (final figure) is expected to have stabilized at 104.7. We see risks for a weaker outcome due to pre-Brexit uncertainty. In the US, growth in both personal spending and income is forecast to have slowed in May.
T-Note future(orange) & S&P future (black): Equities rebound after two days of steep losses, but Core bonds held up well
Britsh yield curve (sov): massive 38 to 45 bps shift lower since Brexit on the back of safe haven, recession fear and rate cut expectations
T-N
Global core bonds resist rebound riskier assets
Peripheral spreads sharply lower
Upside risks German HICP inflation
Upside risks US PCE deflators and downside risks spending and income.
ECB conference & EU Summit continue
Wednesday, 29 June 2016
P. 3
Spending is expected to have risen by 0.4% M/M and income by 0.3% M/M. Regarding prices, the PCE deflator is expected to have slowed from 1.1% Y/Y to 1.0% Y/Y, while the core is forecast to have picked up from 1.6% Y/Y to 1.7% Y/Y. For the price data, we see upside risks, especially in the headline reading. For personal income on the contrary, we see downside risks.
Looking for a new post-Brexit equilibrium
Overnight, risk sentiment remains slightly positive especially on stock markets despite the Istanbul bombings. Main Asian indices gain up to 1% with Japan outperforming (+2%) despite a slightly stronger yen. The US Note future suffers marginally ground while the gold price trades higher. We expect a neutral opening for the Bund.
Today’s eco calendar contains final EMU EC confidence, German inflation, US income & spending data and PCE deflator. In light of recent events, we don’t expect eco data to impact markets. The ECB forum in Sintra and the EU Summit continue and are wildcards for trading. In the wake of the Brexit-vote markets are looking for a new equilibrium. The period of uncertainty about the UK/EU divorce will probably last throughout the Summer and provide safe haven flows. That limits downward potential for core bonds in case of risk on corrections like we witnessed yesterday.
The next rate hike by the Fed is now only discounted by the end of 2018, with a 14% market implied probability of a rate cut in September. Washington Fed-governor Powell already warned for the negative impact on the economy from Brexit. He also argued in favour of an even lower natural rate. Technically, we expect the US 10-yr yield to test the all-time low (1.38%). On intra-EMU bond markets, calm returned after the sharp spread widening on Friday and with key resistances reached. Fundamentals weaken, but ECB buying and the search for yield should compensate.
US Note future : expectations next rate hike postponed to end 2018. US Treasuries gain ground
US-G
Wednesday, 29 June 2016
P. 4
EUR/USD and USD/JPY going nowhere despite risk-on
Yesterday riskier assets like equities and peripheral bonds rebounded after two days of heavy Brexit-related losses. This risk-on trade had only a limited and mixed impact on the major dollar cross rates. Sterling strengthened a bit following steep losses in the previous two sessions. EUR/USD ended the session at 1.1065 up from 1.1025 on Monday eve. USD/JPY climbed to 102.75 from 102 previously. So, the gains of both were very modest given the extent of the European and US equity rebound.
Overnight, Asian equities extend the post-Brexit rebound. A terrorist attack at Istanbul Airport has for now has only limited impact on global trading. Remarkably, the Asian equity rebound occurs even as the yen strengthens (slightly) this morning. Asian and global investors apparently embrace the idea that Brexit uncertainty might induce additional monetary and fiscal stimulus. BoJ’s Kuroda repeated that more funds can be injected in the market. The stimulus hope is supportive for equities but has no big impact on currencies. Do investors assume that a similar strategy will be applied across other major economies? Most commodities rebounded yesterday, but show a mixed picture this morning. AUD/USD stabilizes in the 0.74 area. EUR/USD is also little changed from yesterday’s close and trades in the 1.1065 area;
Today, the ECB conference continues. EU leaders continue their two-day Summit without UK PM Cameron. They will talk about the EU in the post-Brexit area. The eco calendar is well filled. German HICP inflation is expected to have picked up in June from 0.0% Y/Y to 0.2% Y/Y. We see risks for an upward surprise. June EC’s economic confidence (final figure) is expected to have stabilized at 104.7 following an improvement in the previous two months. We see risks for a weaker outcome due to pre-Brexit uncertainty. In the US, growth in both personal spending and income is forecast to have slowed in May to respectively 0.4% M/M and 0.3% M/M. The PCE deflator is expected to have slowed from 1.1% Y/Y to 1.0% Y/Y, while the core is forecast to have picked up from 1.6% Y/Y to 1.7% Y/Y. For the price data, we see upside risks, especially in the headline reading. For personal income we see downside risks. We don’t expect the data to have a big impact on their domestic currency. If anything, the reaction will go via global sentiment on risk. We are inclined the think that negative outliers of the data might be slightly negative for sentiment on risk, but even this link is far from sure.
EUR/USD and USDJPY hardly affect by post-Brexit risk rebound
EUR/USD stabilizes in the 1.10 area
USD/JPY: yen holding strong despite risk-on correction
Asian equities join global rebound even as yen strengthens slightly
EUR/USD shows no clear trend.
Eco data of second tier importance
The post-Brexit-sell-off eases for now
We don ‘t expect a sustained risk-on rebound of EUR/USD and USD/JPY.
Wednesday, 29 June 2016
P. 5
The post-Brexit risk-off rally slowed and is even partially reversed. This rebound had only very limited impact on the major currencies except for the pond. So, for now there is still no clear guide for EUR/UISD and USD/JPY trading. We look how far this risk-on rebound goes. We maintain the working hypothesis that global market volatility due to the fall-out from Brexit isn’t over. In this respect, we keep an eye on the comments from the meeting of the EU leaders (ex UK). We don’t expect big progress on solution for Brexit. After the Brexit-vote, we assumed that EUR/USD entered a sell-on uptick market. The first aggressive repositioning might be over, but new pockets of uncertainty might pop up. Friday’s intraday top (1.1189) is a first short-term reference. A break above this level could be an indication that the first repositioning is running out of steam. Even so, this level is a rather tough resistance. First support comes in at 1.0913 (Friday low) and 1.0822 (March correction low). The context is also intrinsically yen positive, but we have the impression that markets stay reluctant to push USD/JPY aggressively below 100 as they feel uncomfortable with the risk of Japanese (or even coordinated) action.
Sterling rebounds, but fails to convince
Yesterday, the risk on correction on global markets also triggered a technical rebound of sterling. Several European and UK policy makers gave their views as they headed for the EU summit. The communication was ‘polite’, but we didn’t see any indication that both parties are close to some kind of common ground to facilitate the negotiations. Europe still insists on a quick start of the negotiations to prevent unnecessary uncertainty. Still the UK currency rebounded both against the euro and the dollar. The momentum of the rebound already eased later in the session. EUR/GBP closed at 0.8294 (from 0.8336). Cable traded temporary north of 1.34 but closed the session at 1.3344 (from 1.3225).
Overnight, sterling is again in the defensive even if global sentiment on risk isn’t that bad. The move might be partially technically in nature. However, the political stalemate in the UK and the chaos in the two biggest political parties probably also blocks any sustained rebound of sterling. Today, the UK money supply and lending data will be published. However, as they are still from the pre-Brexit era, the market probably won’t give much attention to it. The focus remains on the UK political scene and the EU 27 meeting in Brussels. If there is open discord on the road-map for Brexit among the EU members, it might prologue the period of uncertainty. This would probably also be negative for sterling. Short-term, sterling likely entered a sell-on-upticks pattern. We don’t anticipate 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.. In this context there is no reason to try to catch the falling sterling-knife.
GBP/USD: sterling weakness persists after initial sell-off
Wednesday, 29 June 2016
P. 6
Wednesday, 29 June Consensus Previous US 13:00 MBA Mortgage Applications -- 2.9% 14:30 Personal Income (May) 0.3% 0.4% 14:30 Personal Spending (May) 0.4% 1.0% 14:30 Real Personal Spending (May) 0.2% 0.6% 14:30 PCE Deflator MoM YoY (May) 0.2% / 1.0% 0.3% / 1.1% 14:30 PCE Core MoM YoY (May) 0.2% / 1.7% 0.2% / 1.6% 16:00 Pending Home Sales MoM YoY (May) -1.1% / 4.6% 5.1% / 2.9% Japan 01:50 Retail Sales MoM YoY (May) A0.0%/-1.9% 0.0% / -0.8% 01:50 Dept. Store, Supermarket Sales (May) A -2.2% -0.7% 07:00 Small Business Confidence (Jun) A 46.5 45.6 UK 08:00 Nationwide House PX MoM YoY (Jun) A 0.2%/5.1% 0.2% / 4.7% 10:30 Net Consumer Credit (May) 1.5b 1.3b 10:30 Net Lending Sec. on Dwellings (May) 2.2b 0.3b 10:30 Mortgage Approvals (May) 65.3k 66.3k 10:30 Money Supply M4 MoM YoY (May) -- -0.1% / 1.0% EMU 11:00 Economic Confidence (Jun) 104.7 104.7 11:00 Business Climate Indicator (Jun) 0.26 0.26 11:00 Industrial Confidence (Jun) -3.4 -3.6 11:00 Services Confidence (Jun) 11.0 11.3 11:00 Consumer Confidence (Jun F) -7.3 -7.3 Germany CPI Baden Wuerttemberg MoM YoY (Jun) -- 0.4% / 0.0% 08:00 GfK Consumer Confidence (Jul) A 10.1 9.8 09:00 CPI Saxony MoM YoY (Jun) -- 0.4% / 0.1% 10:00 CPI Brandenburg MoM YoY (Jun) -- 0.3% / -0.2% 10:00 CPI Hesse MoM YoY (Jun) -- 0.4% / 0.0% 10:00 CPI Bavaria MoM YoY (Jun) -- 0.4% / 0.3% 10:30 CPI North Rhine Westphalia MoM YoY (Jun) -- 0.4% / 0.2% 14:00 CPI MoM YoY (Jun P) 0.2% / 0.3% 0.3% / 0.1% 14:00 CPI EU Harmonized MoM (Jun P) 0.1% / 0.2% 0.4% / 0.0% Spain 09:00 Total Mortgage Lending YoY (Apr) -- 9.8% 09:00 House Mortgage Approvals YoY (Apr) -- 14.5% 09:00 CPI EU Harmonised MoM YoY (Jun P) 0.3%/-1.0% 0.5% / -1.1% Belgium CPI MoM YoY (Jun) -- 0.32% / 2.2% Norway 10:00 Retail Sales W/Auto Fuel MoM (May) 0.4% 0.0% Sweden 09:30 Household Lending YoY (May) -- 7.7% Events 28-29/06 EU Leaders Hold Summit in Brussels 01:00 Fed's Powell Speaks in Chicago 10:00 ECB Board Member Lautenschlaeger Chairs Panel in Sintra 12:30 ECB Vice President Constancio Chairs Panel in Sintra 15:30 ECB’s Draghi Participate in Panel at ECB Conference
Calendar
Wednesday, 29 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 0,01 US 0,61 0,00 DOW 17410 17409,72DE -0,11 -0,01 DE -0,67 -0,02 NASDAQ for Exch - NQI #VALUE!BE 0,28 -0,05 BE -0,53 -0,02 NIKKEI 15567 15566,83UK 0,96 0,01 UK 0,17 0,03 DAX 9447,28 9447,28JP -0,23 -0,01 JP -0,31 -0,01 DJ euro-50 2759 2758,67
