Thursday, 04 June 2020

P. 1

Rates: ECB to respond to deteriorating growth and inflation outlook

Core bonds lost additional ground in yesterday’s very positive risk climate. General factors like supply, EU fiscal stimulus and technical elements are at play as well. The German 10-yr yield closed above minor resistance (-0.37%). The ECB is expected to raise its PEPP envelope and strengthen forward guidance because of the weakening growth and inflation outlook.

Currencies: Dollar decline to slow

The global risk rally kept the USD in the defensive yesterday. This morning, sentiment looks like losing some momentum. The rise in LT US yields at some point might also become a modest USD positive. On the euro side of the story, a further easing of the ECB policy is not per se a euro negative. Even so, further EUR/USD gains might become more difficult for here.

Calendar

• US equities extended their rally yesterday with the DJI (+2.05%) outperforming

and the Nasdaq (+0.78%) closing in on the ATH. Asian-Pacific markets trade muted though mostly in the green. Australia (+1%) and Thailand (+2.3%) lead.

• The Trump administration is suspending inbound passenger flights from China after China barred the US from re-entering despite several requests. In a first reaction, China said it’ll allow more foreign airlines to resume inbound flights.

• Merkel’s coalition agreed on another €130 bn stimulus package. The deal includes a temporary VAT-reduction, investing in a 5G network and railways and double incentives for electric vehicles (only).

• The US non-manufacturing index rose from 41.8 to 45.5 in May, beating a 44.4 consensus but still below the neutral 50 barrier. Business activity shot up from 26 to 41 as did new orders (41.9, from 32.9) while employment barely rose.

• Australian retail sales slumped a record -17.7% m/m in April while the trade surplus narrowed some 16% as exports fell more than imports. The data mark the start of what is probably going to be the worst quarterly growth in history.

• The Fed expanded its $500 bn emergency lending programme for state and local governments (MLF) so that every state is able to have at least two cities or counties eligible for MLF, regardless of population.

• In today’s economic calendar US jobless and continuous claims are expected to show further easing from the record highs. The ECB is all but certain to boost its PEPP during today’s policy meeting. Spain and France tap the bond market.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Thursday, 04 June 2020

P. 2

Core bonds lose more ground

Core bonds extended losses yesterday. Risk sentiment remained extremely bullish, especially in Europe. Main indices gained up to 4% with the EuroStoxx 50 bridging the gap between 50% and 62% retracement of the mid-February to mid-March sell-off in just two trading days. Yesterday’s close was within striking distance of this next resistance level (3269.66). Main US indices added between 0.75% (Nasdaq) and +2% (Dow). US eco data (especially ADP employment) remain at distressed levels, but start beating market consensus. The technical break of the US 30-yr yield above 1.5% resistance was confirmed, adding to selling pressure at the long end of the curve and contributing to additional steepening. General factors like the US Treasury’s shift towards increasing longer term funding, the Fed’s reduced presence through asset purchases or the bottoming out of inflation expectations start having an impact as well. US yields eventually rose by 2.7 bps (2-yr) to 6.1 bps (10-yr). German Bunds moved in lockstep with US Treasuries. German yields added 2.5 bps (2-yr) to 6.2 bps (10-yr). Additional factors at play for German/EU yields are the eventual approval of an extra €130bn German spending bill and the momentum generated (since mid-May) by the German-Franco recovery fund proposal. Peripheral yield spreads vs Germany were broadly unchanged with Greece (-5 bps) outperforming. Italy managed to raise €14bn (!) via a syndicated 10-yr benchmark deal which drew offers in excess of €100bn!

Asian stock markets trade more mixed this morning while German Bunds underperform US Treasuries. Overnight news flow remained confined to the same topics (US unrest, US-China squabbles,…). Today’s eco calendar centers around the ECB meeting. We expect deteriorating growth and inflation forecasts to prompt additional easing by raising the PEPP envelope and strengthening dovish forward guidance. By moving now, the ECB also avoids creating market frictions as the PEPP money would run dry after Summer. We expect such scenario to be largely discounted. Core bonds have been losing momentum recently and we don’t think this move already ran out of steam.

From a technical point of view, the German 10-yr yield moved north of first resistance (-0.37%; 50% retracement). For US yields, the Fed’s unlimited QE is the de facto start of curve control which reduced volatility. A trading range between 0.6% and 0.8% opened up. The underperformance of the very long end of the US yield curve starts weighing on the 10-yr tenor as well. We seem to be heading for a test of the upper bound of this narrow trend channel.

Rates

US yield -1d2 0.19 0.035 0.37 0.0510 0.75 0.0630 1.54 0.04

DE yield -1d2 -0.63 0.025 -0.58 0.0510 -0.35 0.0630 0.12 0.06

Af

German 10-yr yield: breaks first resistance at -0.37% US 10-yr yield drifts towards upper bound narrow trend channel

Thursday, 04 June 2020

P. 3

EUR/USD picture remains constructive, but rally might slow

EUR/GBP: rebounding off 0.8865/0.89 support area

USD correction to slow? The global risk rally continued yesterday, keeping the dollar in the defensive. Even so, intraday there were tentative signs that the USD decline could slow. A further rise especially in LT US yields maybe can become a factor to slow USD selling. Eco data in the US and Europe were mostly less negative than feared, but had little impact on trading. In the end, the risk repositioning out of the dollar still prevailed. The TW dollar (DXY) closed at 97.28 (from 97.67). EUR/USD finished at 1.1233. USD/JPY still deviated from the USD-decline and closed higher at 108.90. This morning, Asian equities mostly opened with decent gains, but the momentum gradually eased a bit. Frictions between the US and China persist, this time on the airline sector. A moderation in the equity rally also caused a modest intraday rebound of the dollar. The yuan weakens (USD/CNY 7.125). Recent impressive rally of the Aussie dollar is running into resistance (AUD/USD 0.6915 area). USD/JPY remains well bid and tries to regain the 109 barrier. EUR/USD is losing a few ticks even as Germany approved its additional economic support package. Today, eco data are mostly second tier, but the US weekly jobless claims still will get ample attention. However, the focus will be on the ECB policy decision. The bank is expected to raise the PEPP to € 1000 bln and might with ease its forward guidance. In theory, a further easing might be a euro negative, but investors recently reacted rather mostly positive to additional support for the economy. Of late, the risk rally triggered a broad USD correction. If this risk rally slows, it might also slow further USD selling. Of late interest rates were no major driver for FX, but we put the recent rise in (LT) US yields back on our radar. If extended, it could also become (slight) USD supportive. For now, the EUR/USD picture looks constructive, but a pause might be on the cards with 1.1292 (76% retr) a first technical resistance. EUR/GBP initially traded in the low 0.89 area yesterday, but sterling gradually declined throughout the day. The BoE asking banks to prepare for a no deal Brexit didn’t help sterling. Today, the UK construction PMI will be published. An easing of the risk rally and ongoing negative headlines on the Brexit talks probably keep sterling in the defensive. The 0.8865/0.89 area is becoming a new ST support area.

Currencies

R2 1.1295 -1dR1 1.1250EUR/USD 1.1233 0.0063S1 1.1167S2 1.0964

R2 0.9212 -1dR1 0.9033EUR/GBP 0.8934 0.0035S1 0.8621S2 0.8569

Thursday, 04 June 2020

P. 4

Thursday, 4 June Consensus Previous US 13:30 Challenger Job Cuts YoY (May) -- 1576.90% 14:30 Trade Balance (Apr) -$49.2b -$44.4b 14:30 Initial Jobless Claims 1843k 2123k 14:30 Continuing Claims 20000k 21052k UK 10:00 New Car Registrations YoY (May) -- -97.30% EMU 11:00 Retail Sales MoM/YoY (Apr) -15%/-20.6% -11.2%/-9.2% 13:45 ECB Main Refinancing Rate 0.00% 0.00% 13:45 ECB Marginal Lending Facility 0.25% 0.25% 13:45 ECB Deposit Facility Rate -0.50% -0.50% Events 10:45 Spain to Sell Sr Unsecured Bonds 10:50 France to Sell Bonds 14:30 ECB President Lagarde Holds Press Conference

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 0.75 0.06 US 0.19 0.03 DOW 26269.89 527.24DE -0.35 0.06 DE -0.63 0.02 NASDAQ 9682.911 74.54BE 0.07 0.05 BE -0.47 0.00 NIKKEI 22695.74 81.98UK 0.27 0.05 UK -0.01 0.02 DAX 12487.36 466.08

JP 0.03 0.02 JP -0.16 -0.02 DJ euro-50 3269.59 110.57

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0.30 0.29 0.28 Eonia -0.4570 0.00005y -0.25 0.40 0.33 Euribor-1 -0.4880 -0.0100 Libor-1 0.1788 0.000010y -0.06 0.74 0.46 Euribor-3 -0.3420 -0.0120 Libor-3 0.3305 0.0000

Euribor-6 -0.1740 0.0080 Libor-6 0.4820 0.0000

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

EUR/USD 1.1233 0.0063 EUR/JPY 122.34 0.96 CRB 135.01 0.89USD/JPY 108.9 0.22 EUR/GBP 0.8934 0.0035 Gold 1704.80 -29.20GBP/USD 1.2575 0.0024 EUR/CHF 1.0798 0.0047 Brent 39.79 0.22AUD/USD 0.6921 0.0024 EUR/SEK 10.4296 0.0068USD/CAD 1.3495 -0.0024 EUR/NOK 10.6235 -0.0376

Calendar

Thursday, 04 June 2020

P. 5

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Brussels Research (KBC) Global Sales Force Mathias Van der Jeugt +32 2 417 51 94 Corporate Desk(Brussels) +32 2 417 45 82 Peter Wuyts +32 2 417 32 35 Institutional Desk(Brussels) +32 2 417 46 25 Mathias Janssens +32 2 417 51 95 CBC Desk (Brussels) +32 2 547 19 19 Dieter Lapeire +32 2 417 25 47 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) Prague +420 2 6135 3535 Jan Cermak +420 2 6135 3578

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