Thursday, 29 July 2010

Sunrise Market Commentary

During the summer break (August 02-20) there will be no KBC Sunrise. We will resume the publication from August 24

Sunrise Headlines
 US Equities dropped for a second consecutive day on Wednesday in a rather dull trading session. The
S&P dropped by 0.69% led by health care companies. This morning, most Asian shares trade slightly
lower.

 The US economy kept growing overall, but unevenly and it actually slowed in a few regions as housing
markets softened after the end of a popular tax break, the Federal Reserve said in its Beige Book.

 The Reserve Bank of New Zealand raised interest rates by 25 basis points to 3.00%, but scaled back
its plans for further increases because of weakening growth outlook for Asia and the domestic economy.
The kiwi dollar weakened after the decision.

 The ECB toughened up its lending rules yesterday, saying that from next year banks will face higher
penalties if they use weaker-rated assets as collateral to borrow ECB cash.

 Japanese retail sales rose in June by 3.2% from a year earlier due to government steps, but analysts
warned gains are likely to slow later this years as the effects of such measures are expected to taper off.

 Italy’s centre-right government secured final parliamentary approval of its €25 billion austerity pack-
age which imposes a freeze on public sector wages, cuts in salaries of senior officials and MPs and a
sharp reduction in spending by regional and local authorities.

 The International Monetary Fund finalized yesterday a new $15 billion loan agreement negotiated with
Ukraine’s new government, which will plug holes in the budget of the cash-strapped country.

 Hungary’s financial state is stable, predictable and looks secure even without IMF support, Hungarian
Prime Minister Orban said as the government announced a plan to boost economic growth and create
jobs. Today, Hungary will tap the market for the first time after talks with the IMF collapsed.

 The Russian government, facing several more years of budget deficits, outlined plans to slightly loosen
state control over the economy, aiming to raise as much as $29 billion by selling minority stakes in state
companies.

 Chemicals giant BASF reported this morning a forecast-beating jump in second quarter net profit and
confirmed key parts of its full-year targets. Pharmaceuticals and chemicals company Bayer, on the con-
trary, reported an unexpected 1% decline in net profit, but confirmed its full-year outlook.

 Today, the eco calendar contains the EC confidence indicators, German unemployment, the UK mort-
gage approvals and US weekly claims.

1

Markets
Technicals Sep Bund future
The LT bullish technical picture of
the Bund remains intact, but a re-
test of the contract highs failed and
a modest profit taking correction
took place last week. Main support
area is 127.60-12.
On the downside, support comes
in at 127.74/63 (S1, reaction low
hourly/Bollinger bottom), at
127.45/37 (S2, reaction low
hourly/week low), at 127.27 (S3,
daily envelop), at 127.12 (S4, 21
June low),
On the topside, resistance stands
at 128.09 (R1, breakdown hourly),
at 128.27 (R2, week high), at
128.48/53 (R3, MTMA/breakdown
daily) and at 128.70 (R4, MTMA).
The contract is in neutral territory.
Thursday, 29 July 2010
Sunrise Market Commentary
Yesterday, the economic calendar was rather thin. German CPI inflation came out
slightly higher than expected, according to the first estimate. Inflation rose to 1.2%
Y/Y in July (from 0.9% Y/Y), but this was mainly due to strong base effects coming
from very weak food prices last year. Besides seasonal factors as the summer sales
and holiday season, prices of energy and food rose in July. In the US, the focus was
on the durable goods orders, a rather volatile indicator. In June, the durables
dropped (by 1.0% M/M) for the second consecutive month, while an increase was
expected. Part of weakness was based in the volatile nondefense aircraft component
but also the less volatile durables ex-transportation showed an unexpected decline
(by 0.6% M/M). On a (much) more positive note, orders and shipments for investment
goods were strong, suggesting firms are quite optimistic about the outlook and are
strengthening their competitiveness and production capacity. This certainly compen-
sates for the headline weakness. However, consumers on the other hand continue
to show outright pessimism, now reflected in another weak weekly ABC Consumer
comfort survey.
Regarding markets, it was quite a dull, uninspiring session. Main FX crosses ended
little changed and traded sideways intraday, while equities corrected moderately
lower as previous gains were digested following a good run of late and as main resis-
tances loomed. Also commodities had a pretty uneventful session. Only in the bond
market, the price action was more inspiring.
Global core bonds rebounded following a previous correction that was more out-
spoken in German than in US bonds. The unwinding of safe haven flows that had
benefitted the Bund to the detriment of peripherals was the main reason with the
stress test an important driver. However, the oversold German Bund had arrived
at first support level (127.60/12 or 2.79% for the 10-year yield) while the shorter
end had still corrected more. So, the constellation was good for a rebound,
which was by all standards tepid in the German market and without longer term
significance. Weaker equities (profit taking when reaching obvious resistance) and a
weaker bias in the EMU banking survey were a positive. The situation in the intra-
EMU market was interesting. There was some profit taking in most government cred-
its that had recently performed outstanding, like the Spanish bonds. However, Portu-
guese bonds, that had largely missed the recent rally, and Irish bonds were catching
up and saw a substantial narrowing of their yield spreads with Germany across the
various maturities. The Portuguese bonds were helped by a good auction (see be-
low). The renewed spread widening later in the session, in a thin market, might also
have been influenced by the ECB that announced a tightening of rules on
weaker-rated collateral. While we don’t think the measures that will apply from 2011
onward will cause big problems for banks looking for ECB liquidity, it remains the
case it is a negative especially for the peripheral banking sectors that at least now are
still heavily dependant on ECB liquidity. After European official market closure, the
Bund still profited from a strong US 5-year Note auction and the Beige Book that was
cautious on the outlook, but probably less pessimistic that the headline news lines of
the press agencies suggest.
The ECB July bank lending survey showed still tight conditions in the credit market.
On the supply side, the development was even outright negative as the net tightening
of credit conditions both for corporate and household loans increased in Q2 com-
pared to Q1 and also compared to expectations of banks (as revealed at the moment
the previous report was published in March). The factor behind this deterioration was
the worsening of the banks’ own balance sheet situation, particularly regarding their
liquidity position and access to wholesale funding. The latter was influenced by spill-
over effects of the government debt crisis that flared up in Q2. In this respect, and on
the condition that the situation in the government bond market calms down (which we
expect), this deterioration of the credit supply conditions is not too concerning and
might be reversed in Q3 (as banks expect). The situation on the demand side
showed a gradual improvement in demand for loans. While it remained still slightly
negative in Q2 (but improved from Q1) regarding loans to firms, the situation turned
positive for loans to households. We think that the outcome of the survey will be
seen as neutral by the ECB and without effect on policy.
The ECB allotted €23.2B at its 3-month LTRO operation for which 70 banks turned
up. It replaces maturing €4.8B 3-month liquidity. If one takes the LTRO together with
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 Thursday, 29 July 2010

Sunrise Market Commentary

the MRO at which the ECB allotted €190B in liquidity (versus 201B previously) yes-
terday, the total liquidity increased slightly, but not really significant.
Portugal sold successfully €1.28B of its 3.6% Oct. 2014 and its 4.95% Oct 2023
OT, at the upper side of its target range. The bid/covers amounted to 3.1 and 1.6 re-
spectively. It shows that investors are ready to take Portuguese credit on board, but
still more for shorter maturities, which is quite normal following a credit crisis. The
German-Portuguese spreads, which had come in sharply prior to the auction nar-
rowed somewhat more afterwards and kept most of the narrowing as other credits
saw their spread widen again later in the session. In the US, the $37B 5-year Note
auction went very well. The auction stopped well below the WI bid at the moment of
the stop, bid/cover was very strong and the buy-side takedown solid.
The Beige Book concluded that economic activity had continued to increase since
the previous book, but with some caveats. Atlanta and Chicago reported that eco-
nomic activity had slowed recently, Cleveland and Kansas said that activity gener-
ally held steady, while the others that reported improved activity said the increases
in activity were modest. So, cautiousness is probably the main conclusion. Some of
the negative factors, like the oil spill and the expiration of the tax credit program for
homebuyers, were reported as abating and the slowing is considered more as a soft
patch in the recovery than a genuine slowdown that may derail the recovery. The de-
tails were not so negative. Consumer spending has been generally positive so far this
summer. On the other hand, nearly all districts reported sluggish housing markets.
Financial conditions were termed mixed, as most Districts reported that lending stan-
dards remained tight. Labour markets improved gradually in several Districts with
temporary hiring reported on the rise.
In the US market, the rebound of Treasuries had much more vigour, but a bit suspi-
ciously occurred late in the session. The strong 5-year Note auction should be men-
tioned, leading also to a strong outperformance of the belly of the curve, with some
additional gains following the Beige book. The gains at the wings of the curve were
very modest too. Technically, the move was interesting. The Sep Note future had
dropped below the long-standing uptrendline on Tuesday, but recouped it yesterday
(with a bullish engulfing pattern). So, a new short term bottom may be in place. So,
while it doesn’t exactly match our fundamental view of a break higher, a return to the
highs (123-24) from a technical point of view looks very well possible, but breaking it
would be another matter.
Today, the eco calendar contains the US weekly claims, European Commission
confidence indicators and UK mortgage approvals. In the week ended July the
24th, US initial claims are forecasted to stay broadly unchanged around 460 000 af-
ter some volatility due to less factory shutdowns. Nevertheless, the claims are still
elevated which might be due to many teachers which lost their job due to state & lo-
cal budgetary problems. In the euro zone, European Commission’s economic con-
fidence is expected to show a slight improvement (from 98.7 to 99.1) in July. After
the better than expected IFO, PMI’s and consumer confidence, we believe the risks
are on the upside of expectations. In the UK, the mortgage approvals are expected to
have dropped from 49.8K to 48.8K in June.
Regarding the bond market trading today, we think that no big moves should be
expected, but the positive bias that was visible yesterday may continue. Month end
extension buying is an underlying positive. The US 7-year auction may cause some
cautiousness, but once it is off the table, investors may be glad that the month-end fi-
nancing is done. In EMU, equities might be important with many bellwethers report-
ing. The results were mostly better than expected, which may be enough to offset
overnight weakness in US equities. However, we don’t expect equities to make tech-
nical significant gains (break above 1113/31 S&P, 266 Eurostoxx). The initial claims
are a wild card. So, overall, we expect German and US bonds broadly to keep
ground, eventually gain slightly, but insignificantly today, For the intra- EMU
market, the fate of the Italian BTP auction may matter. There may be some modest
re-widening of the yiels spreads, which would be corrective in nature though.

3

Technicals EUR/USD
Support comes in at 1.2980
(STMA), at 1.2952/46 (Reac-
tion low +Daily envelope) , at
1.2912/00 (Break-up/MTMA),
and at 1.2877 (Week low).
Resistance stands at 1.3047
(Reaction high), at 1.3075/80
(62% retracement/Daily enve-
lope), at 1.3095 (Reaction
high), at 1.3120/24 (Boll top/38
% Retracement 2009) and at
1.3226 (50% retracement).
The pair is still in slightly over-
bought territory.
Thursday, 29 July 2010
Sunrise Market Commentary
On Wednesday, most markets, including the currency market, were captured by
some kind of summer holiday mood. This was especially the case in Europe. The is-
sue of the stress tests was more or less out of the way and there were no important
eco data on the agenda. The ECB lending survey showed still rather tough lending
conditions, but the report had no impact on global markets. The same was true for
the successful Portuguese bond auction with annex spread narrowing. So, EUR/USD
was seen close to the recovery high early in Europe, but there was no driver for fur-
ther gains and the cross rate slipped back to the 1.3000 mark, hoping for some inspi-
ration from the US. The headline figure of the US durable orders came out below ex-
pectations (the details weren’t that bad). Bonds and equities felt the need to react, but
EUR/USD traders once again didn’t know which way to go. EUR/USD continued to
oscillate near the 1.30 mark. In the Beige Book, the regional Fed districts indicated
that the pace of the recovery had slowed. On the other hand, the impact of some
temporary negative factors might fade going forward (cf supra). So, the picture was a
bit mixed. At the time of the release of the Beige book, US equities were under some
moderate downward pressure, but the effect on EUR/USD was still very limited. The
pair closed the session at 1.2995. Just to illustrate the day-to-day dynamics in this
cross rate, the closing levels according to Bloomberg were respectively 1.2996 and
1.2994 on Tuesday and Monday. In a broader perspective, the decline of the trade-
weighted dollar is also almost coming to a halt.
Today, the German unemployment data and the EMU confidence indicators are in-
teresting. Will the good news show on Germany persist? With the respect to the EC
confidence indicators, it will also be interesting whether they will show a similar resil-
ience as was the case for some other data series of late. Last week, the positive sur-
prises in the PMI’s and the Ifo supported the euro. Of course, it is the exception
rather than the rule for the euro to react to EMU data. In addition, the unexpected im-
provement might already be discounted in the currency market. So, we don’t expect
too much of it. Maybe there is somewhat of an asymmetric risk incase of a poor fig-
ure. In the US, the jobless claims are on the agenda. Labour market data will be key
for the Fed policy going forward. So, the claims have market moving potential. Never-
theless, the claims are the only ‘important’ US release today. We doubt that even a
deviation from consensus for this data series on its own will be enough for EUR/USD
traders to finally make up their mind.
Recently, the euro was in good shape, even as a clear brake above the 1.3000
is not such an easy job. From a technical point of view, the question is now whether
the EUR/USD cross rate will be able to take out the 1.3095 (10 May high). A break
above this level could be seen as a further symbolic scaling down of the euro-
skepticism that remained in place, even after the announcement of the huge rescue
package during the weekend of 8/9 May. Recently, we held a tactically inspired ap-
proach as we thought that the euro had already succeeded a nice rebound (from
1.1877 to 1.30 +). In this framework we assumed that it wouldn’t be easy for
EUR/USD to clear the 1.3095 resistance, especially not if there was no high profile
event to trigger more euro strength and/or dollar weakness. We still do not front-run
on such a break, but we are aware that the chances for a break are on the rise. So,
EUR/USD longs should not be in a hurry to scale down EUR/USD exposure and can
wait to see how the test of the 1.3095 resistance fares.
EUR/GBP traders were keeping an eye on the appearance of several BoE policy
makers, including Governor King, before a Parliament’s Treasury Committee. How-
ever, as more or less expected, they came out with a balanced message. Governor
King indicated that the debate was about the appropriate degree of stimulus, not ap-
plying the brakes. He said also that the MPC had room to use monetary policy in ei-
ther direction. BoE’s Sentance repeated its divergent view that the current policy
stance was extreme. However, after all, the hearing brought no big surprises going
into next week’s BoE meeting. EUR/GBP showed some nervous swings during the
hearing, the changes were still limited. Later in the session, EUR/GBP revisited the
0.8315 short term support area, but once again no sustained break occurred.
EUR/GBP closed the session at 0.8330, little changed from the 0.8334 close on
Tuesday.
This morning, the Nationwide house prices came out slightly weaker than expected
at -0.5% M/M and 6.6%. Later today, the UK lending for month of June will be pub-
lished. Recent UK eco data were less negative, but at least for now, we don’t see
them as enough a reason for the BoE to scale down policy stimulation in the near fu
4
 Thursday, 29 July 2010

Sunrise Market Commentary

ture. We see yesterday’s BoE comments as confirming this view. So, we expect King
and Co to keep a wait-and-see approach for now. In this context, we don’t see a rea-
son for EUR/GBP to break out of its recent consolidation pattern anytime soon. In a
day-to day perspective, EUR/GBP is still close to the 0.8317/18 support area. We
need to move away from this level soon in order to prevent a further technical in-
spired downleg. At least yesterday’s BoE speak didn’t provide much ammunition for
such a break.
On Wednesday, USD/JPY was not able to build out Tuesday’s gains. The pair still
set a minor new high early European trading just north of the 88.00 mark. However,
risk sentiment on the European and the US markets was not strong enough to keep
this bid in place. The pair slipped gradually lower throughout the session. A mediocre
stock market performance, a decline in US bond yields and mixed signals on the
pace of the US recovery (data and Beige Book) were al good reasons to reverse a
big part of Tuesday’s gains. The pair closed the session at 87.47, compared top
87.90 Tuesday.
This morning, Asian equities show mostly limited losses. Japanese retail trade data
came out reasonably good, but as usual had hardly any impact on yen trading.
USD/JPY is still a few ticks lower compared to yesterday’s close. However, for now
the bottoming-out hypothesis is not yet rejected as the pair is still well above the re-
cent lows. Recently we had a wait-and-see approach on this cross rate. We felt that
the downside in this pair had become more difficult as the market feared BOJ action
in case of a drop to the 85.00 area. However, there was no positive trigger to unlock
the recent stalemate. At the end of last week/early this week there were some tenta-
tive signs of bottoming out, this is all developing at a very gradual pace. The pair
probably needs a strong improvement in risk appetite or, even more, USD interest
rate support to really move away from the recent lows.

5
 Thursday, 29 July 2010

Sunrise Market Commentary

Bund: First test of the downside trading range fails but rebound
US T-Note future: Nice rebound brings contract again above up- tepid. Nevertheless we might see some (tepid) follow through on
trendline. New ST low in place? Nevertheless, eventual extension the upside. Looks to be sell-on-upticks environment. A break
of rebound should have difficulties breaking above 123-24. (127.12) would be important: Triple top formation

T-Note future (black) and S&P future (orange) intra-day: Strong EUR/USD: 1.3095 remains within striking distance but no real
rebound Treasuries on auction/Beige Book. test has occurred (yet).

USD/JPY partially returned Tuesday’s gains. Hypothesis of bottom- EUR/GBP: test of the 0.8317 support area continues
ing out still holds

6
 Thursday, 29 July 2010

Sunrise Market Commentary

Calendar
Thursday, 29 July Consensus Previous
US
14:30 Initial Jobless Claims (Jul 24) 460K 464K
14:30 Continuing Claims (Jul 17) 4500K 4487K
Japan
01:50 Retail Trade MoM YoY (JUN) A 0.4%/3.2% -2.0% / 2.8%
01:50 Large Retailers' Sales (JUN) A -3.0% -4.0%
UK
10:30 Nat’wide House Prices MoM YoY (JUN) -0.3% / 7.0% 0.3B
10:30 Net Consumer Credit (JUN) 0.2B 0.3B
10:30 Net Lending Sec. on Dwellings (JUN) 1.0B 1.2B
10:30 Mortgage Approvals (JUN) 48.8K 49.8K
10:30 M4 Money Supply (MoM) (YoY) (JUN F) -- 0.0% / 3.0%
EMU
11:00 Business Climate Indicator (JUL) 0.39 0.37
11:00 Indust. Confidence (JUL) -5 -6
11:00 Consumer Confidence (JUL F) -14 -14
11:00 Economic Confidence (JUL) 99.1 98.7
11:00 Services Confidence (JUL) 5 4
Germany
09:55 Unemployment Change (000's) (JUL) -20K -21K
09:55 Unemployment Rate (s.a) (JUL) 7.6% 7.7%
France
08:45 Producer Prices (MoM) (YoY) (JUN) 0.3% / 3.9% 0.0% / 4.3%
Italy
09:30 Business Confidence (JUL) 96.4 96.1
10:00 Hourly Wages (MoM) (YoY) (JUN) 0.2% / 2.6% 0.1% / 2.5%
Belgium
11:15 CPI (MoM) (YoY) (JUL) -- -0.01%/2.46%
Spain
09:00 CPI (EU Harmonised) (YoY) (JUL) -- 1.5%
Sweden
09:15 Consumer Confidence (JUL) 22.1 22.0
09:15 Economic Tendency Survey (JUL) 112.7 112.2
09:15 Manufacturing Confidence (2Q) -- 0
09:30 Retail Sales (MoM) (YoY) (JUN) 0.6% / 3.0% 1.6% / 2.7%
Events
BASF (07:00), Bayer (07:30), Shell (08;00), Volkswagen (09:00) announce Q2
earnings
19:20 Fed’s Fisher speaks on US Economy in San Antonio
Italy BTP & CCT Auctions (2.75-3.5B 2% Jun2013 & 2.5-3.5B 4% Sep2020 & 1.5-
2.5B Dec2015)
US 7-year Notes Auction (29B)

10-year td - 1d 2 -year td - 1d STOCKS - 1d

US 3,00 -0,05 US 0,62 -0,04 DOW 10497,96 -39,81
DE 2,74 -0,03 DE 0,87 -0,01 NASDAQ 0,00 0,00
BE 3,31 -0,04 BE 1,04 -0,04 NIKKEI 9696,02 -57,25
UK 3,48 -0,03 UK 0,88 -0,06 DAX 6178,94 -28,37
JP 1,09 -0,01 JP 0,17 0,00 DJ euro-50 2766,11 -3,20

IRS EUR USD (3M) GBP Eonia 0,48 -0,01

3y 1,712 1,137 1,890 Euribor-1 0,64 0,00 Libor-1 0,571 0,00
5y 2,190 1,868 2,555 Euribor-3 0,90 0,00 Libor-3 0,741 0,00
10y 2,984 2,956 3,525 Euribor-6 1,14 0,00 Libor-6 1,034 0,00

Currencies - 1d Currencies - 1d Commodities CRB GOLD BRENT

EUR/USD 1,3014 0,0003 EUR/JPY 113,51 -0,74 266,16 1166,8 76,16
USD/JPY 87,24 -0,60 EUR/GBP 0,8333 0,0003 - 1d 1,70 4,25 0,04
GBP/USD 1,5613 0,0001 EUR/CHF 1,371 -0,0075
AUD/USD 0,8976 0,0022 EUR/SEK 9,49 0,00
USD/CAD 1,0337 0,0006 EUR/NOK 7,9937 -0,02

7
 Thursday, 29 July 2010

Sunrise Market Commentary

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