FINANCIAL MARKETS TODAY

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1 FINANCIAL MARKETS TODAY European edition Tuesday 26 June 2018 INSIDE TODAY'S EDITION: NEWS & RUMOURS -- ECB Executive Board member Coeure, while commenting on continuation of the QE, said that "we will continue to reinvest the principal payments from maturing securities in our portfolio, or around 15 bln per month, in 2019" -- The RBNZ is expected to leave the OCR at 1.75%, at the June OCR announcement this Thursday. FOREX MARKET STRATEGY The USD index eased on Monday despite negative risk sentiment (triggered by unconfirmed reports that the Trump administration will restrict Chinese investments in the US), which failed to spur safe-haven demand for the currency. BOND MARKET STRATEGY Treasuries opened the week to firmer footing on Monday as equities were clobbered as trade tensions continued to escalate. US PREVIEWS: HOME PRICES & CONSUMER CONFIDENCE ON TAP The June Conference Board consumer confidence report will be released on Tuesday at 10:00EDT (14:00GMT). We expect the headline measure will decrease to around in June, versus the reading that occurred in May. GERMANY: IFO SURVEY SHOWS WANING CONFIDENCE he German Jun Ifo headline business climate index drops to from a revised (prev 102.2) in May, not too far away from the revised market consensus prediction of (prev 101.8). Although not as bad as feared, this latest development with the Ifo survey still continues the general downward trend that has been in train since Dec. FX TECH FOCUS: USD/JPY & AUD/USD -- USDJPY: [Bearish turn -20%] Slipping down below the pivotal level -- AUDUSD: [Bearish pause -20%] Seeing some pull back from low, resist at DAILY ECONOMIC DIARY DD/MM GMT R* CTRY DATA RELEASE FOR ACTUAL IDEA MEDIAN LAST /06 10:00 1 UK CBI RET SALES JUN /06 13:00 2 US S&P/CS COM-20 Y/Y APR 6.75 N/A 6.79% 26/06 14:00 4 US CONSUMER CONF JUN /06 22:45 4 NZ TRADE BALANCE NZD MAY N/A M *R=Market Significance rating, on scale 0-5 Source: Reuters/Bloomberg DD/MM GMT CTRY EVENT UK BOE CHIEF ECONOMIST HALDANE SPEAKS IN WALES 26/06 08:00 EU ECB'S HANSSON SPEAKS 26/06 08:30 UK UK FINANCE PUBLISHES BANKS' MORTGAGE APPROVALS, MAY

2 Financial Markets Today 26 June 2018 page 2 26/06 09:00 IT BOND AUCTION 26/06 09:00 UK SOON-TO-BE BOE MPC MEMBER HASKEL PARL TSC 26/06 09:30 UK BOE MPC'S MCCAFFERTY OMFIF FORUM 26/06 09:30 UK BOND AUCTION 26/06 12:00 EU ECB VP DE GUINDOS SPEAKS 26/06 17:00 US ATLANTA FED PRESIDENT BOSTIC SPEAKS 26/06 17:00 US BOND AUCTION (2YR T-NOTE) 26/06 17:45 US DALLAS FED PRESIDENT KAPLAN SPEAKS NEWS & RUMOURS China development bank said it would work with local governments to grant financing for rural redevelopment projects in an orderly and lawful manner; the bank will provide CNY 437bn in loans to support rural city projects as of end-may - Caixin. China's central bank injected CNY 80bn liquidity in reverse repos. France's Finance Minister Maire, while speaking with the media, said that Europe will respond if the US imposes a 20% tariff increase on European made cars. Said that the US' President Trump has wrongly bet on European weakness. Said that there can't be a status-quo on euro zone; hopes that the US soon realizes that tariffs are bad for their own economy. Added the need for an independent European financing body for the EU. ECB Executive Board member Coeure, while commenting on continuation of the QE, said that "we will continue to reinvest the principal payments from maturing securities in our portfolio, or around 15 bln per month, in 2019". Added that the Eurogroup's measures on Greece are in the right direction. Lastly, said that the CB expects rates to be unchanged at least until the summer of Japan PM Abe said that the BoJ's easing is not directed at weakening the yen. Said that he wants to secure US understanding of the reasons for the BOJ policy. Australia ANZ-Roy Morgan weekly consumer confidence notched higher to 121.4, from in the previous week. The RBNZ is expected to leave the OCR at 1.75%, at the June OCR announcement this Thursday. A clear, consistent message will be retained that the CB will remain cautious until inflation shows consistent signs of life. In light of the recent lacklustre data pulse, the RBNZ's prognosis of economic momentum and inflation pressure will be watched with interest. We expect that the RBNZ will eventually tighten monetary policy in the second half of 2019, once it is assured that inflation is alive and well. The RBNZ said that the NZ dollar remains at an elevated level and policy will continue to be accommodative for a considerable period. White House trade adviser Navarro, while speaking on CNBC said that "things are bullish" in the US economy, 4% growth is seen ahead. Added that there is a misunderstanding about President Trump's trade policy. Said that there are no plans to impose investment restrictions. The market has responded very positively to signals that will defend US intellectual property. -- Recap from Monday's European session -- The May US Commerce Department new home sales report revealed an increase in the headline measure to 689k (+6.7% m/m), versus the revised 646k reading that occurred in April (prev. 662k), well above market expectations for a 667k result. Overall, upward pressure stemmed from an increase seen in only 1 of 4 measured regions, entirely located in the South (+17.9%), partially offset by downward

3 Financial Markets Today 26 June 2018 page 3 pressure in the Northeast (-10.0%) and the West (-8.7%), alongside an unchanged reading from the Midwest. The supply of new homes decreased to 5.2 months in May (from 5.5 months). Meanwhile, the median price pushed lower on a m/m basis to $313.0k (-1.7% m/m, -3.3% y/y), versus the $318.5k reading seen in April. IDEA: alongside the increase seen in May, we expect new home sales will find greater support over the course of 2018, though likely finding some headwinds from higher mortgage rates. The Dallas Fed Texas Manufacturing Outlook Survey revealed upward pressure in the general business activity index to in June, versus the reading seen in May. Meanwhile, the production index decreased to in June, versus the reading seen for May, coming off a 12- year high. The Chicago Fed National Activity Index weakened to in May, versus the revised reading seen for April (prev ). According to the release, the 3-month moving average came in at for May, versus the revised result seen for April (prev ). IDEA: this significance of the 3-month moving average in the series is its attempt to gauge the probability of a recession (below after a period of expansion would suggest recession). Overall, recent performance is suggesting subdued inflationary pressure from economic activity over the coming year. UK 10 Downing Street spokesperson says the govt has a longstanding engagement with business in relation to the Brexit process, which is set to continue, and that the govt is confident it can secure a Brexit deal that all employers should find acceptable. He also asserts that companies are free to air their views on Brexit publicly, if they so desire - Reuters. The population in Spain grew for the second year in a row in 2017, rising by a net 132,263 people to 46.66m, its highest since Jan 2013, due to a net increase in migrants. Reuters. The US Treasury plans to raise scrutiny of Chinese investments in sensitive US technology industries due to security risks, according to sources cited by Bloomberg. US Treasury Secretary Mnuchin will reportedly release the plan on 29 June. EU Commissioner Katainen said the bloc would have no choice to react if President Trump applies the new tariffs to European cars that he threatened on Friday- Le Monde on Saturday/Bbg -. The UK's five main business lobby groups told PM May over the weekend that they are "deeply concerned" about the slow pace of Brexit talks and warned that time is running out for a deal to safeguard hundreds of thousands of jobs [Bbg]. IDEA: Indeed, with just 9 months remaining before the UK leaves the EU, businesses may have to prepare for the possibility of no new trade arrangements being in place -- even though a transition deal remains likely. ECB Chief Economist Praet clarified that the ECB didn't decide to end QE at year-end but only expressed its "anticipation" of that happening. He also reiterated that rates would remain at current levels as long as necessary to insure that inflation sustainably adjusts towards its target [Expresso magasine interview released over the weekend/bbg]. IDEA: This dovish remark reportedly weighed on the euro earlier; but in reality we believe the bar would be very high for the ECB to extend bond purchases into Ifo economist cites debate about the U.S trade war and the weaker global economy as reasons for the June fall in German business confidence. Says export expectations have fallen further and the Germany economy is on the path to normalisation and adds economic boom times in Germany are over - Reuters. Germany's Ifo Business Climate index for June fell to from 102.3, the lowest since May The Current Assessment component dropped more than expected, by one point, whereas the Expectations component exceeded expectations by being unchanged. (See details/analysis below.)

4 Financial Markets Today 26 June 2018 page 4 FOREX MARKET STRATEGY The USD index eased on Monday despite negative risk sentiment (triggered by unconfirmed reports that the Trump administration will restrict Chinese investments in the US), which failed to spur safe-haven demand for the currency. In an otherwise fairly quiet day, the DXY dipped below support and would next face which we'd look for to hold. Along the same lines, EUR/USD reached the figure, but we look for it to run out of steam at or USD/JPY dropped from the figure a 2-week low of around on safe-haven-yen buying, and the pair should next face support at about and if this environment persists. GBP/USD stayed between and , following an early dip after UK business lobbies warned about slow Brexit progress. Trading may be choppy ahead of the EU summit at the end of the week, but sterling's upside will be limited unless there signs emerge of progress with regard to Brexit negotiations. Note also that several BoE members speak on Tuesday, and if they hint at an August rate rise that would boost the currency. EUR/SEK climbed to virtually the mark for the first time in 1-1/2 months, just in reaction to high risk aversion, which tends to weigh on the krona. Despite the significance of the upward break, we'd look for the pair to turn south again soon. Amidst steady oil prices (following their OPEC-led rise at the end of last week), USD/CAD rose slightly to around (while still below Friday's brief 1yr high of which came after Canada's unexpectedly-poor CPI and retail sales data). Trump trade war fears tend to spill over to Canada due to its sensitivity to NAFTA renegotiations. In this context, USD/CAD should trade between and s/term, with the bias slightly to the upside. AUD/USD meanwhile reversed some of Friday's bounce to almost , with the pair now in a range between there and the support level that it touched twice last week. BOND MARKET STRATEGY US: Treasuries opened the week to firmer footing on Monday as equities were clobbered as trade tensions continued to escalate. Adding new dimensions to this evolving conflict, the Trump Administration announced plans to limit investments in US technology companies (though not explicitly naming China, the restrictions are clearly aimed at Chinese investments). This came alongside news of US companies announcing plans to increase production abroad in order to avoid retaliatory tariffs (specifically Harley Davidson announced plans to increase production in Europe). With respect to data, markets were greeted by stronger than expected new home sales, bursting higher to 689k. However, this was treated as little more than background noise with clear focus remaining on trade tensions. Markets now look ahead to a greater flow of data on Tuesday, highlighted by S&P CoreLogic Case-Shiller home prices and Conference Board consumer confidence data, followed by a 2Yr Note auction later in the session. Additionally, markets receive commentary from Atlanta Fed President Bostic and Dallas Fed President Kaplan. EUROPE: With the week beginning with a risk-off mood in the markets, it wasn't surprising that the 10yr German yield extended last week's decline to almost touch the 0.30% mark for the first time in 4 weeks. (Tensions over immigration in German Chancellor Merkel's coalition government are also contributing to safe-haven demand for Bunds although the latter notably underperformed US Treasuries on the day.) Nevertheless, the yield could be near the bottom, and we doubt that last month's spike down below 0.20% will be seen again. After all, while the Trump trade war is weighing on confidence, there isn't much sign of its having detracted very

5 Financial Markets Today 26 June 2018 page 5 much from global economic prospects yet. An example of this, Germany's IFO index declined only moderately, in line with expectations, and the expectations component held unchanged. BTP yields rose, though, as their spread over Germany widened another 15bps to 250bps (a 2-week high) or so after Italy's League party performed well in local elections. (That was little surprise, though, as the far-right party has been polling strongly in recent months due its popular anti-immigrant stance.) In any case no national elections are due and the League is already part of the governing coalition. Nonetheless, the spread move is in line with what we see as the asymmetric bias for BTP underperformance; it would next face its 8 June high of 270bps. US PREVIEWS: HOME PRICES & CONSUMER CONFIDENCE ON TAP S&P CoreLogic Case-Shiller: The April S&P CoreLogic/Case-Shiller composite home price index will be released on Tuesday at 09:00EDT (13:00GMT). Alongside expectations for further gains in the coming quarters, we expect the S&P/Case-Shiller home price index will show relatively maintained support in April on a m/m basis. However, this is likely to yield modest downward pressure on the composite-20 measure on a y/y basis, to around 6.75% in April. In terms of composite weighting, increases came from Seattle (+13.0% y/y), Miami (+5.0% y/y), Las Vegas (+12.4% y/y), San Francisco (+11.3% y/y), Los Angeles (+8.1% y/y), Dallas (+5.8% y/y), Portland (+6.7% y/y), Detroit (+7.9% y/y), Denver (+8.6% y/y), San Diego (+7.7% y/y), Tampa (+7.5% y/y), Atlanta (+6.2% y/y), Boston (+5.8% y/y), Phoenix (+6.8% y/y), Minneapolis (+6.1% y/y), New York (+5.2% y/y), Washington DC (+3.0% y/y), Chicago (+2.8% y/y), Charlotte (+6.2% y/y) and Cleveland (+4.6% y/y). Consumer Confidence: The June Conference Board consumer confidence report will be released on Tuesday at 10:00EDT (14:00GMT). We expect the headline measure will decrease to around in June, versus the reading that occurred in May. Despite broader expectations for maintained gains moving forward, we expect a decrease will be seen in June, bringing the headline measure to around The preliminary June Michigan headline measure increased to 99.3 (up from 98.0). Alongside the stronger headline result, survey readings show the consumer in a stronger situation (as seen via the economic conditions: 117.9, from 111.8), while less support was seen from expectations (87.4, from 89.1), with respondents indicating some level of concern stemming from tariffs. Providing some upside risk to our forecast was the weaker reading seen in the IBD/TIPP economic optimism index which pushed lower to 53.9 in June (from 53.3). Providing some concern for consumer remains any fallout stemming from financial concerns, leaving many on edge with respect to job prospects (though this has clearly faded amidst ongoing job market improvement) and credit conditions. This will likely continue to fade as conditions improve as we move further into Thus far, April readings have been relatively mixed, despite general improvement seen in jobless claims. All things considered, we look for the headline measure to post an overall decrease to around GERMANY: IFO SURVEY SHOWS WANING CONFIDENCE The German Jun Ifo headline business climate index drops to from a revised (prev 102.2) in May, not too far away from the revised market consensus prediction of (prev 101.8). The current conditions sub-index eases to vs expected and from a revised in May (prev 106.0), while the future expectations sub-index holds steady at 98.6 vs 98.0

6 Financial Markets Today 26 June 2018 page 6 expected and from a revised 98.6 in May (prev 98.5). Reuters. It is evident that the intensified transatlantic trade/tariff war and the weakened prospect for global growth are adversely affecting business sentiment, so EURUSD is not yet out of the woods. Although not as bad as feared, this latest development with the Ifo survey still continues the general downward trend that has been in train since Dec, after peaking in Nov The quarterly pattern obviously reflects this, with the Q2 average of the headline indicator now down at 102.1, from in Q1, and marking the lowest quarterly average since Q So, with there being a correlation between this variable and the annual rate of GDP, with a 1Q lag, we wouldn t be surprised to see a lower annual rate for Q2 GDP, after a wda reading of 2.3% y/y in Q1. Such a deceleration of the annual rate of GDP growth would not however preclude a slight increase in the quarterly GDP growth rate, after the badweather-related deceleration to 0.3% q/q in Q1. So we would still expect to see a slight corrective acceleration in the Q2 quarterly rate Contemporaneous correlation is Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 German industrial orders & Ifo expectations sub-index Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Ifo expectations sub-index, lhs Industrial orders y/y, rhs Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 2m lagged correlation of Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 That said, recent oil price increases, the escalating transatlantic trade war, the general slowing momentum of global growth and increased uncertainty among businesses, all blight the outlook for future GDP growth in Germany, which in turn would have consequences also for overall Eurozone GDP growth prospects. As it stands though, with the latest Ifo headline reading still some 4pts above its l-r average of 97.4, we would interpret the latest developments as indicative, at this time, of a gentle soft-landing glide path for the German economy from a pretty high altitude, back towards trend growth rates, rather than signalling the genesis of a major economic downturn. There are concerns however about a potential political crisis that could be starting to brew in Chancellor Merkel s CDU-led grand coalition, over the issue of immigration, which could undermine confidence further, should it persist, and put a damper on investment spending prospects. The increased risk of a bad deal Brexit could also hurt the investment plans of several German manufacturing companies in the longer term. But shorter term, the risk of waning industrial orders figures is on the increase. % FX TECH FOCUS: USD/JPY & AUD/USD USDJPY [Bearish turn -20%] Traded a high of earlier this month on the latest attempt to push back to the current swing high of Slipping lower below the pivotal level and

7 Financial Markets Today 26 June 2018 page 7 risk developing for a head and shoulder reversal pattern. Key support at on further selling and below would signal a return to the bears and levels then at /106.60, even back to the swing low. Need to clear above to renew the bulls for a more sustained recovery back towards the range highs of / AUDUSD [Bearish pause -20%] The sharp continuation of the bear trend earlier this month took the price action below and traded just short of the next swing low at Seeing some pull back from there now with resist at on further correction. Momentum remains with the bears and a failure to recover back above leaves the price vulnerable to a test back to the / swing lows.

8 Financial Markets Today 26 June 2018 page 8 Contributors: L. Abisogun, D. Bir, E. Brown, M. Clarke, E. Holmberg, J. Karasin, M. Loader Tel.: (Ldn) / (N.Y.) / (Sing.) research@ideaglobal.com 2018 IDEAglobal TM Limited *** NO DISTRIBUTION INTERNALLY OR EXTERNALLY WITHOUT PERMISSION. *** DISCLAIMER: IDEAglobal products are supplied on IDEAglobal s standard terms and conditions, a copy of which is available on request. Without prejudice to any provisions contained, in such terms, IDEAglobal and all identified data suppliers obtain information for their analysis and forecasts from sources they consider reliable but neither IDEAglobal nor any identified data supplier guarantees its accuracy or completeness. All conditions, warranties and representations expressed or implied by statute, common law or otherwise in relation IDEAglobal services are excluded and in no event shall IDEAglobal or any identified data supplier be liable for any losses or damages, whether indirect or consequential foreseen or unforeseen including loss of profit or other economic loss arising out of any IDEAglobal service. The liability of IDEAglobal and any identified data supplier shall be limited as set out in subscription agreements (or shall be nil if there is no subscription agreement).