Tuesday, 20 July 2010

Sunrise Market Commentary

Tomorrow there will be no Sunrise due to National Holiday in Belgium. Next KBC Sunrise on Thursday the 22nd of July.

Sunrise Headlines
 Yesterday, US Equities ignored a weaker than expected NAHB housing market index and reversed part
of the losses of Friday. The Dow/S&P gained 0.60% / 0.56%. This morning, most Asian shares trade in
positive territory, while Japanese stocks start the week lower after a long weekend.

 ECB purchases of euro zone government bonds has slowed to a virtual halt, data showed, adding sub-
stance to suggestions from policymakers that the programme could soon be phased out.

 US President Obama accused his Republican opponents yesterday of playing election-year politics by
refusing to join with Democrats in approving an extension of US jobless benefits.

 China sounded a gloomy note this morning about its export prospects, warning in particular that belt-
tightening by deeply indebted EU governments would dampen demand for the country’s goods.

 The Bank of England said yesterday it planned from next year to accept portfolios of loans to individu-
als and non-banks as collateral from financial institutions wishing to use its discount window facility.

 Japan’s government said it would stick to caps on spending and new bond issuance in the next fiscal
year, although meeting the targets is expected to be tough given rising social welfare costs.

 Nationalised German lender Hypo Real Estate is said to have failed the pan-European stress test on
its capital under a scenario that combines an economic slowdown with sovereign-debt losses.

 In the Minutes for its July meeting monetary policy meeting, the Reserve Bank of Australia said its
previous interest rate rises gave it flexibility to leave policy unchanged for now, especially in the face of
rising uncertainty about the health of the world economy.

 Today, the eco calendar contains the US housing starts and permits, UK M4 money supply and public
sector net borrowing. The Bank of Canada will decided on rates and supply comes from Greece, Spain
and Ireland.

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. Main support area is
127.60-12, but a drop below last
week’s low (128.18) would be a
concern.
On the downside, support comes in
at 128.58/50 (S1, Reaction low/Boll
Bottom), at 128.33 (S2, daily enve-
lope), at 128.18/16 (S3, Reaction
low/Break-up) and at 127.63/58 (MT
break-up/neckline).
On the topside, resistance stands
at 129.05/14 (R1, Breakdown hourly
+ MTMA/Daily envelope) , at
129.54/57 (R2, Reaction highs), at
129.70 (R3 Boll top) and at 129.93
(R4 Reaction high).
The contract is in neutral territory.
Tuesday, 20 July 2010
Sunrise Market Commentary
Traders didn’t really know what signal to pick up at the start of the new trading week.
On the one hand there were several reasons to expect more risk averse investor be-
havior. The poor US consumer confidence release on Friday and the subsequent eq-
uity sell-off were still fresh in traders’ minds. In addition, European markets had to di-
gest two additional negative news headlines. Hungary halting negations with the IMF
and the EU on the review of its funding programme was not a supportive factor for
global investor sentiment as it brought the European sovereign debt crisis again in
the spotlights. To make things even worse, Moody’s downgraded the credit rating of
Ireland at the start of trading in Europe. The eco calendar was thin with only the US
NAHB housing market index, which disappointed. In July, the index fell back to its
lowest level since April last year, while only a marginal drop was expected.
However, all this negative news had only a limited and very temporary impact on
global markets. Core bonds were well bid at the start of trading, but the gains were
limited and could not be sustained. Equity markets even succeeded a moderate re-
covery on Friday’s sell-off, supported by some decent results and M&A ru-
mours/stories. On the intra-EMU government bond market, there was some widening
pressure at the start of the session but also this move was reversed very soon. For
example the Spanish 10-year spreads narrowed 7 basis points and Italy narrowed 4
basis points. After some initial widening, the damage for the Irish 10-year spread was
only 4 basis points. This is not what one would expect in case of a flaring up of the
sovereign debt crisis. At the close of the European trading session, sentiment turned
again a bit more negative, reversing a positive open on the US equity markets and
erasing early gains in Europe, too. Surprisingly, the turnaround in risk sentiment oc-
curred after the publication of the NAHB housing market index, a data series that
usually gets little attention on markets. Nevertheless, even this move had no strong
legs. US equities closed the session with gains of just over 0.5%. US bond yields
rose between 2.1 basis points and 3.9 basis points. German bonds underperformed
again as yields rose by 5/6 basis points, with the belly of the of the curve underper-
forming. In line with the ECB action the previous weeks and as was recently hinted by
several ECB policy makers including President Trichet, the bank reduced further its
purchases of government bonds. The amount was said to have declined to €302 mil-
lion last week.
Today, the euro zone eco calendar remains thin, while in the US, the housing starts
and permits are scheduled for release. Attention will also go out to supply as Greece,
Spain and Ireland will tap the market.
Last month, the housing starts (May) dropped sharply as the end of the tax credit
depressed sales. Weakness is expected to continue in June, although the figure will
probably not be as bad as in May (-2.2% M/M). We believe however that the risks
could be on the downside of expectations due to massive flooding in certain parts of
the South and Midwest. Building permits, on the contrary, are forecasted to in-
crease marginally (0.2% M/M) after falling significantly in the previous two months. In
the UK, the public finance data and CBI industrial trends survey are on the agenda.
Regarding trading, we hold on our established view that the Bund is in a consolida-
tion pattern. Sentiment on the European bond markets remains constructive. Never-
theless, we continue to see little value in the Bund, trading sustained north of the
129.93 reaction action high. Today Greece will sell 13-week Bills and Spain 12- and
18-month Bills. The auction of Irish bonds (2016 and 2020) will also receive some at-
tention from the market.
On the currency market, one would also have expected that the stories on Hungary
and Ireland were a good enough reason for more follow through selling on the
EUR/USD correction at the end of last week. However, any material euro losses
didn’t occur. On the contrary, after a cautious start, the pair soon returned beyond the
1.29 mark. The Ireland downgrade was largely ignored as in line with other rating
agencies. On Hungary, most traders apparently came to the conclusion that, as was
the case early June in Hungary, tactical considerations prevailed. This might be the
case, but one can not ignore that Hungary’s move is a challenge to Europe’s perse-
verance to adopt an approach of tough budgetary austerity. European equity markets
moved soon into positive territory and EUR/USD spiked higher too. At some point it
even looked as if the pair would go for a retest of the 1.30 area. Later in the session,
2

Technicals EUR/USD
Support comes in at 1.2927
(Reaction low), at 1.2902/98
(STMA/daily envelope), at
1.2871 (Reaction low), at
1.2848 (break-up hourly) and at
1.2805 (Break-up hourly).
Resistance stands at 1.3032/47
(Last target H&S), at 1.3059/65
(Daily envelope/Boll top), at
1.3095 (10 May high) and at
1.3124 (38% retracement).
The pair is in overbought terri-
tory.
Tuesday, 20 July 2010
the euro rally calmed a bit, but at Sunrise Market Commentary
the end of the day one couldn’t but come to the conclusion that the euro weathered
the storm reasonably good.
Last week, we indicated that the market focus had tilted toward dollar weakness. The
break above the 1.27 resistance area improved the short-term picture for EUR/USD
and opened the way for a retest of the 1.3095 area (early May reaction high after the
announcement of the EU rescue package). From a longer term fundamental point of
view, we are still not convinced that a slowdown in the US and the rest of the world
would be supportive for the euro. Europe desperately needs a strong contribution to
its growth from exports to counterbalance the negative impact from the fiscal austerity
measures that are put in place across the continent.
Yesterday morning, it looked as if there would be room for some further profit taking
on recent EUR/USD gains, given the negative news flow. However, for now the
downside in the EUR/USD pair remains well supported, even in case of negative
news. Today, we don’t see a trigger to overthrow the current market thinking. US
housing data might confirm the poor status of this part of the US economy and the
US equity futures don’t show a major move in either direction. So, US investors will
continue to look out for Bernanke’s monetary policy report before Congress tomorrow
and on Thursday. Next to the Fed policy, the easing of tensions on the intra-EMU
government bond markets is a short-term positive for the single currency. The ques-
tion is of course how long these moves can/should continue. A prolonged period of a
loose monetary policy in the US should be more or less discounted in the (currency)
market and also the improvement/tightening on the peripheral European bond market
won’t continue for ever. Nevertheless, in a day-to-day perspective, one can not be
take notice of the fact that market sentiment remains euro supportive. 1.3095 (10
May high) remains the next high profile target on the EUR/USD charts.
On Monday, the euro also succeeded a very strong performance against ster-
ling. We didn’t see much GBP-negative news to explain the move. EUR/GBP break-
ing above the 0.8428/43 resistance area might have caused additional stop-loss ster-
ling selling. Yesterday, there were also market rumours that early euro shorts
(against sterling) set up after the downgrade of Ireland, were squeezed out later in
the session. Whatever the reason, the pair had a very strong run yesterday. Today,
the UK monthly budget data and the CBI trends orders are on the agenda. From a
fundamental point of view, we have the impression that the correction in EUR/GBP
has gone far enough. Nevertheless, as is the case for EUR/USD there is apparently
no trigger available to turn this trend.
USD/JPY moved up and down in step with global investor sentiment. A decent start
of the European equity markets lifted the pair temporary above the 87.00 mark, but
the move was reversed during the US trading hours. There was a lot of market chat-
ter that the BOJ was considering to take action in case the pair would stay around
85.00. However, there was no hard/official evidence for these rumours. Nevertheless,
the fear for interventions might limit investors’ appetite to take additional yen long ex-
posure, especially in case sentiment on the equity markets isn’t that bad.
3
 Tuesday, 20 July 2010

Sunrise Market Commentary

US T-Note future: test of the highs ongoing, but no clear break yet Bund in sideways trading range. Topside looks difficult for now

EUR/USD: extends gains; negative headlines on Hungary and

S&P (500): earnings fail to give a clear signal for equity trading Ireland were ignored

USD/JPY: holding close to the lows. BOJ preparing action ? EUR/GBP: joining the broader euro rebound

4
 Tuesday, 20 July 2010

Sunrise Market Commentary

Calendar
Tuesday, 20 July Consensus Previous
US
14:30 Housing Starts (JUN) 577K 593K
14:30 Housing Starts MoM (JUN) -2.8% -10.0%
14:30 Building Permits (JUN) 575K 574K
14:30 Building Permits MoM (JUN) 0.2% -5.9%
23:00 ABC Consumer Confidence -- -44
Canada
15:00 Bank of Canada Rate 0.75% 0.50%
Japan
07:00 Leading Index CI (MAY F) A 98.6 98.7
07:00 Coincident Index CI (MAY F) A 101.2 101.2
09:00 Convenience Store Sales YoY (JUN) -- -3.2%
UK
10:30 Public Finances (PSNCR) (JUN) 16.0B 12.0B
10:30 Public Sector Net Borrowing (JUN) 13.0B 16.0B
10:30 M4 Money Supply MoM YoY (JUN P) -0.1% / 2.9% 0.0% / 2.8%
10:30 Major Banks Mortgage Approvals (JUN) 52K 51K
12:15 CBI Trends Total Orders (JUL) -24 -23
Germany
08:00 Producer Prices (MoM) (YoY) (JUN) A 0.6%/1.7% 0.3% / 0.9%
Italy
10:00 Industrial Orders (MoM) (YoY) (MAY) 0.2% / 19.2% 4.7%/20.6%
10:00 Industrial Sales (MoM) (YoY) (MAY) -- 0.5% / 6.4%
Belgium
15:00 Consumer Confidence (JUL) -- -9.0
Events
Goldman Sachs (14:00), Johnson & Johnson (before market), Yahoo (after mar-
ket) announce Q2 earnings
11:15 ECB Allots Funds in Weekly Refinancing Operation
16:00 Fed's Tarullo Testifies on Financial Regulation in Senate
Greece Sells 13-week Bills (1.5B)
Spain Sells 12- and 18- month Bills (5-6B)
Ireland Bond Auction (1-1.5B 4.6% Apr2016 & 5% Oct2020)
UK Conventional Gilt Auction (3.75B 4% Sep2016)

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

US 2,97 0,04 US 0,60 0,01 DOW 10154,36 56,54
DE 2,66 0,05 DE 0,84 0,06 NASDAQ 0,00 0,00
BE 3,32 0,06 BE 1,12 0,11 NIKKEI 9291,24 -117,12
UK 3,31 -0,02 UK 0,75 0,01 DAX 6009,11 -31,16
JP 1,10 0,00 JP 0,16 0,00 DJ euro-50 2634,60 -11,01

IRS EUR USD (3M) GBP Eonia 0,56 0,00

3y 1,645 1,173 1,733 Euribor-1 0,61 0,01 Libor-1 0,571 0,00
5y 2,113 1,915 2,393 Euribor-3 0,87 0,01 Libor-3 0,736 0,00
10y 2,898 2,976 3,350 Euribor-6 1,12 0,01 Libor-6 1,022 0,00

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

EUR/USD 1,2983 0,0078 EUR/JPY 113 1,19 261,2 1183,5 75,7
USD/JPY 87,05 0,39 EUR/GBP 0,8493 0,0061 - 1d -1,02 -9,05 0,46
GBP/USD 1,5283 -0,0017 EUR/CHF 1,3652 0,0125
AUD/USD 0,8777 0,0092 EUR/SEK 9,5175 0,00
USD/CAD 1,0515 -0,0023 EUR/NOK 8,1513 0,03

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 Tuesday, 20 July 2010

Sunrise Market Commentary

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