Friday, 30 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 fell for a third consecutive day on Thursday as strong data from the euro zone failed to
convince US investors ahead of the second quarter GDP data. This morning, Asian shares trade in
negative territory.

 US Federal Reserve officials clashed yesterday over whether the central bank should be more ag-
gressive in supporting the stumbling economy as one said the current Fed policy may be contributing
to worrying low levels of inflation.

 China’s reform of its exchange rate regime is not having a major impact on the country’s exporters,
deputy central bank governor Hu Xiaolian said this morning.

 Japan’s factory output marked its biggest fall in more than a year in June and manufacturers expect
further declines in July, boding ill for the fragile economic recovery. Core consumer prices posted their
16th straight month of annual declines. A group of ruling party lawmakers renewed calls for the Bank of
Japan to target inflation and weaken the yen.

 Hungary sold a more-than-planned 57.5 billion forints in government bonds, in its first long-term
debt sale since talks with the IMF and EU collapsed. The debt agency was upbeat on the results, but the
auction had no big impact on the forint, which weakened later yesterday.

 Moody’s Investors Service changed yesterday its rating outlook on Iceland to negative, indicating the
country’s debt is more likely to be cut into junk territory over the coming year and a half.

 British consumer morale fell to its lowest level in almost a year in July as worries about the impact of
government spending cuts drove expectations for the next 12 months to their lowest since the deepest
point of the recession.

 Poland’s government is due to approve a document outlining public finance developments for the next
four years as it struggles to rein in public debt and deficit levels that ballooned during the global financial
crisis. According to sources, the deficit will be set at 45 billion zlotys.

 Today, the eco calendar contains the first estimate of US Q2 GDP, Chicago PMI, euro zone CPI infla-
tion and the unemployment rate.

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
finally a serious correction took
place. Main support area remains
127.60-12, a break would be highly
significant. Currently, the Bund di-
gests the decline and works off
oversold conditions. A sustained
break above 128.45 (MTMA) would
call off the alert, but is not enough to
become again bullish ST. Sideways
range may stay intact.
On the downside, support comes in
at 128.18 (S1, gap open hourly), at
127.92 (S2, STMA/flat), at
127.78/68 (S3, reaction high/daily
envelop), at 127.61 (S4, Bollinger
bottom), and at 127.37 (S5, reaction
low),
On the topside, resistance stands at.
128.45/53 (R1, MTMA/breakdown
daily), at 128.78 (R, breakdown
hourly) and at 128.90/91 (R3, reac-
tion high hourly/ 62% retracement).
The contract is in neutral territory.
Friday, 30 July 2010
Sunrise Market Commentary
Regarding the economic data, The European data suggest that the EMU econ-
omy is the economic star performer that goes with strong momentum into the
third quarter. This is unusually as at the same time, the US growth momentum is
waning and similar signals are coming from emerging markets, with this time the Bra-
zilian Central Bank saying that growth momentum is slowing. So, while we rejoice
the European performance, we remain a bit sceptical and think that later on this
year European growth might slow too, following a strong Q2 (and possible Q3).
The euro is again stronger and the fiscal austerity measures taken in the zone will re-
straint spending going towards 2011. The German unemployment figures came out
exactly in line with expectations, but this doesn’t hide the fact the labour market is
improving. Germany is clearly leading the European economy. The European Com-
mission confidence indicators confirmed the improving sentiment, that was already
visible in the PMI’s and IFO, but the widespread nature of the improvement (including
Portugal and Greece, but not Spain) and the positive details (thicker order-books and
improving labour market sentiment) give more weight to the message send out earlier
by the PMI’s and IFO’s. US Initial claims came out slightly lower than expected,
while the continuing claims surprised on the upside. However, Initial claims are still
elevated and the trend decline that was visible through much of 2009 stalled since
February of this year. The most recent disappointing figures might be due to layoffs
from state & local government workers and dislocations on the Gulf Coast.
Regarding markets, the strong European eco data and the batch of encourag-
ing earnings results of many European bellwethers had some impact during
the European and early US session in the form of stronger equities and euro,
while the impact on global bonds was negligent (see below). However, equities
couldn’t sustain as strong technical resistances in both the EuroStoxx (see graph)
and the S&P held, setting the stage for profit taking later on. The euro closed with
gains against the dollar, visited briefly the 1.31 threshold, but receded too. Commodi-
ties did well, including oil and copper. One instinctively looks to the dollar weakness
as a driver, but it doesn’t completely satisfy. Equities at the end were lower, suggest-
ing that growth indicators weren’t the strong market drivers.
Regarding global bonds, German and US bonds ended the session with mod-
est gains, but in the case of German bonds, the gains were mostly an overnight
thing, as the Bund closed little changed from opening levels. Also the gains of
US bonds were very modest, making us describe the overall price action in the
main bond markets as sideways oriented. German bonds ignored in the morning
session both the strong (but largely as expected) eco data and the positive sentiment
on the equity markets (due to good corporate results). In initial US trading, both
Bunds and US Treasuries lingered around unchanged levels. However, after a strong
opening of US equities, investors started to sell equities and this move was reflected
in rising bonds. While the US bond rebound showed some vigour, this was missing in
the German bond market. However, US bonds lost again some altitude in the run-up
to the 7-year T-Note auction, also as equities recouped losses, and corrected some-
what further after the weak auction results were published. The auction stopped
well above the WI bid at the stop and the bid/cover was weak, as was the buy-side
participation. A late session renewed dip of equities lifted Treasuries to close the day
with modest gains.
In the intra-EMU bond market, trading was thin. The sharp narrowing of the yield
spreads of the peripheral credits to the bonds that ran out of steam earlier this week
was followed by some profit taking and thus renewed widening of the spreads. This
was visible in the Spanish 10-yr (yield spread widened 5 bps) and Italian market
(+3bps). The Italian BTP auction went reasonably well, but couldn’t prevent a small
widening of spreads. Portuguese, Irish and Greek 10-year bonds that had lagged the
trend of narrower yield spreads, but caught up with the movement more recently saw
their spreads re-widen too. Yield spreads at the shorter maturities (2-year) still nar-
rowed somewhat. The yield spreads between core bonds and Germany were little
changed.
Today, the eco calendar is well-filled. Most attention will go out to the first estimate of
US Q2 GDP, but also interesting will be the euro zone CPI estimate, unemployment
rate and US Chicago PMI survey.
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 Friday, 30 July 2010

Sunrise Market Commentary

In the US, GDP growth is expected have slowed somewhat further in the second
quarter. The consensus is looking for an annualized growth figure of 2.5% Q/Q (from
2.7% Q/Q in Q1). The main growth contributor will probably be consumer spending,
but also fixed investment is expected to make a positive contribution in the second
quarter. Inventories and especially net-export might put a drag on growth. The gov-
ernment’s contribution is somewhat mixed as the Federal Government should have
boosted growth due to the 2010 Census outlays, while local governments will proba-
bly have a negative impact due to budget woes. Recently put into the limelight by the
California decision to declare a state of fiscal emergency. We have no reasons to dis-
tance ourselves from the consensus, but a weaker outcome won’t go unnoticed as it
might (unfounded?) fears for a double dip. In the euro zone, CPI inflation is ex-
pected to have risen from 1.4% Y/Y to 1.7% Y/Y in July. We believe, however, that
the risks might be on the upside of expectations as a 0.7% M/M decline of last year
falls out of the calculation. Also German and Spanish CPI surprised on the upside of
expectations. The unemployment rate is expected to stay unchanged at 10.0% in
June. The Chicago PMI is expected to show a 3-points drop in July (56.0 from 59.1)
after a slight decline in the month before. We believe however that the risks might be
on the downside of expectations after the sharp drop in the Philly Fed indices; also
the seasonal adjustment factor is a negative. The final figure of University of Michi-
gan consumer confidence is expected to show a slight upward revision compared
to the first estimate, which was a big disappointment.
Some regional Fed president’s spoke to the press. According to press articles, St-
Louis Fed Bullard said that the risks of deflation Japanese style has risen somewhat
compared to the beginning of the year, even if the main scenario is still for economic
growth to continue ultimately lifting inflation of the current very low levels. However,
should the risk scenario become the main one, Bullard said the Fed may do more
quantitative easing and pump credit into the economy. At the same time, he was
against the Fed’s vow to keep rates very low for an extended period of time as it may
increase the probability of a Japanese-like outcome. He added however he was not
inclined to follow Kansas Fed Hoenig in his dissent, but preferred to debate and to
convince his colleagues at the FOMC. Dallas Fed Fisher was quoted as saying that
further monetary accommodation would have as little effect in boosting the economy
as “pushing on a string”. We will try to get a transcript of the comments and the
research piece of Bullard to get a better insight in the reasoning behind these
headline quotes.
Regarding bond markets today, US and European equities rejected yesterday a test
of resistance and overnight Asian equities are trading down too. This should lead to
weaker European equity trading in the European session. Weaker UK consumer con-
fidence published overnight, bad Japanese eco data and Samsung downbeat com-
ments about the outlook. This is a fertile ground for bonds. The Bund opened also
strong. An upward surprise in EMU HICP is a small threat, but probably without last-
ing effect. Markets should have already positioned for such an outcome. We have put
downside risks on both the US GDP and Chicago PMI, which would be positives too.
However, despite this list of bond positives for today, we still think that any rise in
German bonds is corrective in nature (on the previous down-move) and will
keep them in their sideways range. In the US, the technicals show that the
Treasuries are still in an uptrend, but the upside looks nevertheless limited to
the recent highs (124-24).

3

Technicals EUR/USD
Support comes in at 1.3046
(Reaction low), at 1.3032/23
(Daily envelope/STMA) , at
1.2996 (Break-up), at 1.2930
(MTMA), and at 1.2877 (Week
low).
Resistance stands at 1.3107
(Reaction high), at 1.3124 (38
% Retracement 2009), at
1.3157 (Boll top +daily enve-
lope) and at 1.3226 (50% re-
tracement).
The pair is moving in over-
bought territory.
Friday, 30 July 2010
Sunrise Market Commentary
On Thursday, after two days of directionless trading; the EUR/USD cross rate per-
formed again quite a decent up-leg. As was often the case of late, the move was in-
spired by both dollar weakness and euro strength. It has been different in the recent
past, but yesterday there was even some negative market chatter on the fiscal situa-
tion in the US. Rating agency Moody’s was quoted that the US needed to elaborate a
credible plan to address its soaring debt to maintain its AAA-credit rating. In addition,
the difficult fiscal situation in California got some coverage too, as governor Schwar-
zenegger declared a state of emergency of the State’s finance. We don’t say that all
this had a big negative impact on the dollar, but it was no help either. On the other
hand, the news flow from Europe was again mostly positive. Good results from sev-
eral major (European) companies supported risk taking. German unemployment de-
clined as expected and the EU sentiment indicators confirmed the positive trend of
late. The US jobless claims were close to expectations. During the day, there was
also market chatter on end of month repositioning which was supposed to be away
from the dollar. This context was enough a reason for EUR/USD to test the key
1.3095 resistance area. A sustained break didn’t occur, as US equity indices failed to
extend their gains. Nevertheless, the euro preserved most of the intraday gains and
close the session at 1.3079, compared to 1.2896 on Wednesday.
Today, in Europe some attention will go to the July CPI estimate. However, the focus
will be on the US with the first estimate of the Q2 GDP, the Chicago PMI and the final
Michigan consumer confidence are scheduled for release. The key question is
whether US economic growth is that weak so that additional Fed support is needed. If
so, the dollar could face another setback, at least short-term. Today’s data is only
one element in this debate. However, some kind of double dip in the US is not our
basic scenario longer term.
Recently, the euro was in good shape. Nevertheless, the EUR/USD pair took a
breather earlier this week before finally clearing the 1.3000 mark in a sustained
way. From a technical point of view, the cross rate is currently challenging the 1.3095
resistance (10 May high). As is always the case, we could have chosen other techni-
cal/tactical levels in this area. We took this one as it marked the top of the unsuccess-
ful ‘rebound’ after the announcement of the EU rescue package during the weekend
of 8/9 May. So, 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
that huge rescue package. Recently, we held a tactically inspired approach 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 area, especially not if there was no high profile event to trigger
more euro strength and/or dollar weakness. There was not really high profile news
yesterday, but the ongoing positive news flow from Europe at least remains a surpris-
ing factor, especially if compared to the extremely euro negative sentiment that
reigned until just a few weeks ago.
From a fundamental point of view, we think that quite some good news from
Europe should be discounted after the recent euro rebound and the same might be
true for the negative news on the dollar, especially as our basic scenario is for the US
economy to muddle through this recent spot of weakness. Nevertheless, in a day-to-
day perspective, there is no good reason to row against the tide now. So, EUR/USD
longs should not be in a hurry to scale down EUR/USD exposure and can still wait to
see how far this move goes, protecting its position with trailing stops.
Yesterday, EUR/GBP joined the broader euro rebound. In addition, the UK data
(lending data, and earlier in the session the NationWide House prices) were slightly
sterling negative too. There was strong support in place in the 0.8313/17 area. So,
this combination was a good reason for the EUR/GBP to return higher in the estab-
lished consolation pattern. Nevertheless, as was the case earlier this week, the
EUR/GBP pair often showed quite some intraday swings, but no key barrier was hit.
This was also the case yesterday. EUR/GBP closed the session at 0.8376, compared
to 0.8330 on Wednesday. Overnight, the UK GFK consumer confidence came out
weaker than expected. However, until now the impact on EUR/GBP trading is non-
existent (sterling is even a few ticks stronger against the euro). Later today, the cal-
endar of UK eco data is empty.
4
 Friday, 30 July 2010

Sunrise Market Commentary

Recently, some 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-
ture. We see this week’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 yesterday moved away from the 0.8313/17/18
support area. For now, we don’t see a strong argument for the pair to drop below this
level ahead of next week’s BoE meeting.
On Thursday, USD/JPY was just a good exponent of broader dollar weakness. The
positive headlines from Europe (logically) were not really a big issue for this cross
rate. The price action in EUR/JPY at best slowed the decline in the headline cross
rate a bit. Nevertheless, the trend was obviously south and the pair closed the ses-
sion at 86.79, compared to 87.47 on Wednesday. So, the mid-week rebound in the
pair was very short-lived.
This morning Japanese eco data in global came out weaker than expected, with es-
pecially disappointing production data catching the eye. The Nikkei lost 1.64%; un-
derperforming the rest of Asia. The disappointing Japanese data didn’t prevent the
yen from attracting safe have bids. USD/JPY tested the year lows (86.25/27). Re-
cently 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. 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. We don’t
have to impression that this trigger will be available anytime soon. So we expect the
pair to hover close to the current lows.

5
 Friday, 30 July 2010

Sunrise Market Commentary

US T-Note future: Nice rebound brings contract again above up- Bund: First test of the downside trading range fails and is fol-
trendline. New ST low in place? Nevertheless, eventual extension lowed by corrective return action. Looks to be sell-on-upticks
of rebound should have difficulties breaking above 123-24 (high). environment in the broader 127.12/60 to 129.93 range

EUR/USD: testing the 1.3095 resistance as the news flow was

EuroStoxx: resistance (potential triple bottom) played its role. both dollar negative and euro supportive.

USD/JPY: testing the year lows EUR/GBP: test of the 0.8317 support area rejected again

6
 Friday, 30 July 2010

Sunrise Market Commentary

Calendar
Friday, 30 July Consensus Previous
US
14:30 GDP QoQ (Annualized) (2Q A) 2.5% 2.7%
14:30 Personal Consumption (2Q A) 2.4% 3.0%
14:30 GDP Price Index (2Q A) 1.1% 1.1%
14:30 Employment Cost Index (2Q) 0.5% 0.6%
15:45 Chicago Purchasing Manager (JUL) 56.0 59.1
15:55 U. of Michigan Confidence (JUL F) 67.0 66.5
Canada
14:30 Gross Domestic Product MoM (MAY) 0.2% 0.0%
Japan
01:15 Nomura/JMMA Manufacturing PMI (JUL) A 52.8 53.9
01:30 Job-To-Applicant Ratio (JUN) A 0.52 0.50
01:30 Jobless Rate (JUN) A 5.3% 5.2%
01:30 Overall Hhold Spending (YoY) (JUN) A 0.5% -0.7%
01:30 Tokyo CPI YoY (JUL) A -1.2% -0.9%
01:30 Tokyo CPI Ex Food, Energy YoY (JUL) A -1.4% -1.4%
01:30 Natl CPI YoY (JUN) A -0.7% -0.9%
01:30 Natl CPI Ex Food, Energy YoY (JUN) A -1.5% -1.6%
01:50 Industrial Production MoM YoY (JUN P) A -1.5%/17% 0.1% / 20.4%
01:50 Loans & Discounts Corp YoY (JUN) A -4.1% -3.5%
06:00 Vehicle Production (YoY) (JUN) A 25.9% 30.6%
07:00 Housing Starts (YoY) (JUN) A 0.6% -4.6%
07:00 Annualized Housing Starts (JUN) A 0.750M 0.737M
07:00 Construction Orders (YoY) (JUN) A -10.2% 9.2%
UK
01:01 GfK Consumer Confidence Survey (JUL) A -22 -19
EMU
11:00 Unemployment Rate (JUN) 10.0% 10.0%
11:00 CPI Estimate (YoY) (JUL) 1.7% 1.4%
Germany
08:00 Retail Sales MoM YoY (JUN) -0.2% / 1.0% 3.0% / -2.4%
Italy
11:00 CPI - EU Harmonized (MoM) (YoY) (JUL P) -0.9% / 1.7% 0.1% / 1.5%
12:00 Unemployment Rate (SA) (JUN) 8.8% 8.7%
Belgium
14:15 Unemployment Rate (JUN) -- 8.6%
15:00 GDP sa and wda (QoQ) (YoY) (2Q P) -- 0.1% / 1.0%
Spain
09:00 Unemployment Rate (Survey) (Q2) 20.00% 20.05%
Sweden
09:30 GDP s.a. (QoQ) (YoY) (2Q P) 1.1% / 3.4% 1.4% / 3.0%
09:30 Wages - Non-Manual Workers YoY (MAY) -- 1.8%
Norway
09:00 Unemployment Rate (JUL) 3.1% 2.8%
Switzerland
11:30 KOF Swiss Leading Indicator (JUL) 2.30 2.25
Events
01 Aug China Manufacturing PMI (Jul) 51.4 52.1

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

US 2,98 -0,01 US 0,58 -0,04 DOW 10467,08 -30,88
DE 2,72 -0,02 DE 0,85 -0,02 NASDAQ 0,00 0,00
BE 3,31 0,00 BE 0,93 -0,11 NIKKEI 9537,30 -158,72
UK 3,42 -0,06 UK 0,80 -0,08 DAX 6134,70 -44,24
JP 1,08 -0,01 JP 0,17 0,00 DJ euro-50 2752,93 -13,18

IRS EUR USD (3M) GBP Eonia 0,45 -0,03

3y 1,677 1,084 1,818 Euribor-1 0,64 0,00 Libor-1 0,573 0,00
5y 2,162 1,810 2,480 Euribor-3 0,90 0,00 Libor-3 0,744 0,00
10y 2,951 2,930 3,440 Euribor-6 1,15 0,00 Libor-6 1,034 0,00

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

EUR/USD 1,3075 0,0060 EUR/JPY 113,04 -0,46 270,2 1168,25 77,35
USD/JPY 86,48 -0,76 EUR/GBP 0,8369 0,0036 - 1d 4,04 1,45 1,19
GBP/USD 1,5617 0,0004 EUR/CHF 1,3613 -0,0096
AUD/USD 0,8997 0,0022 EUR/SEK 9,462 -0,03
USD/CAD 1,0353 0,0019 EUR/NOK 7,9682 -0,03

7
 Friday, 30 July 2010

Sunrise Market Commentary

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