15 JULY 2021 OTP Morning Brief • Europe's stock indices closed near-stagnant; the BUX underperformed • Markets gave a mixed reaction to better-than- expected earnings reports; Apple closed at new high • The Fed Chair's words brought down US long-term yields; the HUF weakened further • China published GDP data, and the USA will release IP figures in the afternoon www.otpresearch.com 1 15 JULY 2021 Europe's indices closed near stagnant, Hungary's BUX lagging behind its regional peers The higher-than-expected US and UK inflation data weighed on Western Europe's leading indices yesterday. But the sentiment improved after the Fed chairman's messages, helping the key stock markets close near zero. The German and the French indices ended nearly flat, that of Italy inched up 0.1%, the British and Spanish stock markets eased 0.5% and 0.4%, respectively. The Stoxx600 sank 0.1%, dragged down by real estate and tourism, but propelled by the tech sector. In the UK, June inflation (+2.5%) surpassed expectations, but the Bank of England said the temporary acceleration in price growth was not unexpected, as pent up demand and supply bottlenecks occur simultaneously once the pandemic abates. The most important question regarding the BoE’s August forecast is how sustainable the above processes will be and whether they will be built into expectations. The BoE forecasts UK inflation to peak above 3% at the end of 2021, but then it subsides, so there will be no need to change the monetary policy stance. The euro area's industrial production (-1%) undershot expectations, mainly because the semiconductor shortages adversely affected carmakers. Supply problems could persist in the coming months, economists say, while surveys point to strong demand. In Central Europe, the Polish (+0.2%) and Czech (+0.4%) indices rose, while Hungary's BUX (-0.9%) lagged behind them; all of its blue chips declined: OTP lost 0.9%, MOL slid 0.6%, MTelekom shrank 0.5%, and Richter fell 1.4%. Mixed reaction to better-than-expected flash reports; Apple closed at a new peak Jerome Powell's dovish words helped US 10Y yields drop near levels where they were before Tuesday’s release of higher-than-expected inflation in America, the release of which had sent them above 1.4%. Even the stronger-than-expected rise in producer prices could not hold back yields from falling. In its Beige Book, which was released yesterday, the Fed pointed to a significant increase in the employment of low-skilled workers, while acknowledging that some of the businesses it polled were uncertain about whether rising inflation was a temporary phenomenon. Following the Fed chairman’s speech, most stock indices rose slightly, with thin turnover: the Dow and S&P edged 0.1% higher, while the Nasdaq Composite shed 0.2%. The Fed's messages and the subdued market reactions to Tuesday's surprise inflation data suggest that higher inflation will not jeopardize economic growth or the persistence of loose monetary conditions. Several major US banks published their earnings reports yesterday. Citigroup’s earnings per share (USD 2.85) surpassed expectations (1.96), yet its share price fell 0.3%. Bank of America’s earnings fell slightly short of expectations due to a 6% drop in interest income; the diluted EPS (80 cents) is just above the expected 77 cents; yet its stock price fell 2.5%. Wells Fargo’s EPS (USD 1.38 versus the expected 97 cents) also beat expectations; its profit growth benefited from releasing the USD 1.6 billion provision; accordingly, its stock price grew by 4%. Blackrock's EPS also beat the market's expectations (USD 10.03 compared to the forecast USD 9.46); the company’s assets under management surged 30% in one year, but its stock price contracted by 3.1%. Delta Airlines surprised on the upside: it became profitable for the first time in five quarters – but after an initial positive reaction, its share price descended 1.6%. In contrast, American Airlines (+3%) took off as its loss was smaller than expected and the management announced better-than-expected revenue expectations. Apple's shares rose by 2.4% to close at all-time high; the company had asked its suppliers to boost the production of next-generation iPhone by 20%; and JPMorgan raised its target price for the company, anticipating a further 20% share price increase. www.otpresearch.com 2 15 JULY 2021 The Fed Chair's words brought down US long-term yields; the HUF's weakening continued US 10-year yields eased five basis points on Wednesday. The market appreciated Fed Chairman's testimony at yesterday’s hearing in Senate, which suggested that the current loose monetary conditions would be maintained for the time being. Jerome Powell said that the US economy's recovery had not yet reached the point when the massive bond purchase programme could begin to be phased out; his statement was in line with the minutes of the Fed’s latest policy meeting. This was the first time when Mr Powell acknowledged that high inflation could persist in the USA in the coming months. The dollar's weakening sent the EUR/USD to 1.183 by 20:00 (CEST). German and French 10Y yields fell two basis points each, while the UK Gilt yield did not budge. Yesterday's forint weakening pushed the EUR/HUF to a two-month high of more than 359 by the evening, and the USD/HUF closed near 303, returning from an intraday high of 304.65. Hungary's secondary market bucked the trend prevailing on international bond markets: at the long end of the curve, benchmark securities with a maturity of 5Y and rose by 1-3 bps, while the 6M Treasury bill jumped by nine basis points as the list of benchmark securities changed. In the MNB's 5Y fixed- rate collateralised loan tender, bids for more than HUF 135 billion was submitted, of which the MNB accepted the usual amount, HUF 10 billion, at 0.90% interest rate. Today's highlights The year-over-year reading of China’s Q2 GDP fell slightly short of expectations, but the quarter/quarter economic growth beat expectations. Retail sales, industrial production and investment data for June signalled a slowdown in growth, but surpassed market expectations. The data also confirmed investors’ view that the People's Bank of China would keep up its loose monetary policy. Accordingly, China's stock index rose by 0.4% this morning and Hong Kong upped 1.2%; India's stock market gained 0.5%. Bucking the trend, Japan's stock market slipped 1.2%, as the rise in coronavirus infections left its mark on trading sentiment. Index futures suggest that trading in Europe may start on a weak footing today. The UK publishes unemployment data this morning. In addition to Thursday's release of US jobless claims, the Fed’s New York Manufacturing Index and industrial production data will see the light of day in America. In Hungary, the MNB holds a fixed-rate 1W deposit tender today, and the ÁKK auctions securities with remaining maturities of 5Y, 12Y, and 20Y. www.otpresearch.com 3 15 JULY 2021 Stocks Bonds Commodity & FX Daily Daily Product Product Daily Product Close change YTD (%) Yield YTD* Close change YTD (%) name name change* name (%) (%) S&P500 4374 0.1 16.5 VIX 16.3 -4.6 -28 WTI 73.1 -2.8 50.7 DOW 34933 0.1 14.1 US 2Y 0.22 -3.0 10 Brent 74.76 -2.3 44.3 Nasdaq C. 14645 -0.2 13.6 US 10Y 1.35 -7.1 43 Gold 1825.0 0.8 -3.7 DAX 15789 0.0 15.1 GER 2Y -0.68 -0.7 3 Silver 26.25 0.5 -0.6 CAC40 6558 0.0 18.1 GER 10Y -0.32 -2.5 25 EUR/USD 1.1837 0.5 -3.1 FTSE 100 7091 -0.5 9.8 PT10Y 0.28 -1.7 25 EUR/GBP 0.8540 0.2 -4.4 Global FTSE MIB 25194 0.1 13.3 IT 10Y 0.71 -0.5 17 EUR/NOK 10.3400 0.0 -1.3 Stoxx600 461 -0.1 15.4 SP 10 0.31 -1.0 27 USD/CAD 1.2509 0.0 -1.7 - Banks 132 0.3 22.1 iTRAXX 46.8 0.5 -2 AUD/USD 0.7481 0.0 -2.8 Nikkei 225 28262 -1.2 3.0 JPY 2Y -0.13 0.0 0 USD/JPY 109.97 -0.6 6.5 SSEC 3544 0.4 2.0 JPY 10Y 0.01 0.0 0 GBP/USD 1.3860 0.3 1.4 RTS 1626 -1.4 17.2 RUS10 7.2 1.0 133 USD/RUB 74.083 -0.3 -0.4 WIG20 2269 0.2 14.3 POL 10 1.7 -0.1 45 EUR/PLN 4.56 -0.3 0.1 Regional PX50 1159 0.4 12.8 CZ10 1.7 3.3 48 EUR/RON 4.929 0.0 1.4 BUX 47185 -0.9 12.2 3M DKJ 0.48 0.0 20 EUR/HUF 358.36 0.3 -1.2 OTP 15570 -0.9 16.5 1Y 0.81 0.0 42 USD/HUF 302.75 -0.2 2.0 MOL 2402 -0.6 9.7 3Y 1.77 0.0 107 CHF/HUF 331.10 0.3 -1.3 Hungary MTelekom 424 -0.5 11.6 5Y 2.06 1.0 70.0 PLN/HUF 78.58 0.7 -1.1 Richter 8010 -1.4 7.7 10Y 2.85 3.0 77.0 GBP/HUF 419.64 0.1 3.3 * In the case of bond yields, the change is in basis points instead of percentage (VIX and iTRAXX not included).