jul 29 kbc sunrise mkt commentary

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Sunrise Market Commentary

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Thursday, 29 July 2010

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 slightlylower.

The US economy kept growing overall, but unevenly and it actually slowed in a few regions as housingmarkets 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 backits 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 analystswarned 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 asharp reduction in spending by regional and local authorities.

The International Monetary Fund finalized yesterday a new $15 billion loan agreement negotiated withUkraine’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, HungarianPrime 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 loosenstate control over the economy, aiming to raise as much as $29 billion by selling minority stakes in statecompanies.

Chemicals giant BASF reported this morning a forecast-beating jump in second quarter net profit andconfirmed 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.

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



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MarketsYesterday, the economic calendar was rather thin. German CPI inflation came outslightly 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 salesand holiday season, prices of energy and food rose in July. In the US, the focus wason the durable goods orders, a rather volatile indicator. In June, the durablesdropped (by 1.0% M/M) for the second consecutive month, while an increase wasexpected. Part of weakness was based in the volatile nondefense aircraft componentbut 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 investmentgoods were strong, suggesting firms are quite optimistic about the outlook and arestrengthening their competitiveness and production capacity. This certainly compen-sates for the headline weakness. However, consumers on the other hand continueto 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 moderatelylower 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 bondmarket, 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 hadbenefitted the Bund to the detriment of peripherals was the main reason with thestress test an important driver. However, the oversold German Bund had arrivedat 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 termsignificance. Weaker equities (profit taking when reaching obvious resistance) and aweaker 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 catchingup and saw a substantial narrowing of their yield spreads with Germany across thevarious 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 alsohave been influenced by the ECB that announced a tightening of rules onweaker-rated collateral. While we don’t think the measures that will apply from 2011onward will cause big problems for banks looking for ECB liquidity, it remains thecase it is a negative especially for the peripheral banking sectors that at least now arestill heavily dependant on ECB liquidity. After European official market closure, theBund still profited from a strong US 5-year Note auction and the Beige Book that wascautious 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 tighteningof 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 momentthe previous report was published in March). The factor behind this deterioration wasthe 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 onthe condition that the situation in the government bond market calms down (which weexpect), this deterioration of the credit supply conditions is not too concerning andmight be reversed in Q3 (as banks expect). The situation on the demand sideshowed a gradual improvement in demand for loans. While it remained still slightlynegative 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 beseen 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 turnedup. It replaces maturing €4.8B 3-month liquidity. If one takes the LTRO together with

Technicals Sep Bund future

The LT bullish technical picture of the Bund remains intact, but a re-test of the contract highs failed anda modest profit taking correctiontook place last week. Main supportarea is 127.60-12.

On the downside, support comesin at 127.74/63 (S1, reaction lowhourly/Bollinger bottom), at127.45/37 (S2, reaction lowhourly/week low), at 127.27 (S3,daily envelop), at 127.12 (S4, 21June low),

On the topside, resistance standsat 128.09 (R1, breakdown hourly),at 128.27 (R2, week high), at128.48/53 (R3, MTMA/breakdowndaily) and at 128.70 (R4, MTMA).

The contract is in neutral territory.



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On Wednesday, most markets, including the currency market, were captured bysome 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 importanteco data on the agenda. The ECB lending survey showed still rather tough lendingconditions, 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, butEUR/USD traders once again didn’t know which way to go. EUR/USD continued tooscillate near the 1.30 mark. In the Beige Book, the regional Fed districts indicatedthat the pace of the recovery had slowed. On the other hand, the impact of sometemporary negative factors might fade going forward (cf supra). So, the picture was abit mixed. At the time of the release of the Beige book, US equities were under somemoderate downward pressure, but the effect on EUR/USD was still very limited. Thepair closed the session at 1.2995. Just to illustrate the day-to-day dynamics in thiscross 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 ECconfidence 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 exceptionrather 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 expecttoo 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 keyfor 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/USDtraders to finally make up their mind.

Recently, the euro was in good shape, even as a clear brake above the 1.3000is 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 breakabove 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 rescuepackage 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 (from1.1877 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 profileevent to trigger more euro strength and/or dollar weakness. We still do not front-runon 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 canwait to see how the test of the 1.3095 resistance fares.

EUR/GBP traders were keeping an eye on the appearance of several BoE policymakers, 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 policystance was extreme. However, after all, the hearing brought no big surprises goinginto next week’s BoE meeting. EUR/GBP showed some nervous swings during thehearing, the changes were still limited. Later in the session, EUR/GBP revisited the0.8315 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 expectedat -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 seethem as enough a reason for the BoE to scale down policy stimulation in the near fu

Technicals EUR/USD

Support comes in at 1.2980

(STMA), at 1.2952/46 (Reac-tion low +Daily envelope) , at1.2912/00 (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 (Reactionhigh), at 1.3120/24 (Boll top/38% Retracement 2009) and at1.3226 (50% retracement).

The pair is still in slightly over-bought territory.



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ture. We see yesterday’s BoE comments as confirming this view. So, we expect Kingand 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 aday-to day perspective, EUR/GBP is still close to the 0.8317/18 support area. Weneed 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 stillset 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 keepthis bid in place. The pair slipped gradually lower throughout the session. A mediocrestock market performance, a decline in US bond yields and mixed signals on thepace of the US recovery (data and Beige Book) were al good reasons to reverse abig part of Tuesday’s gains. The pair closed the session at 87.47, compared top87.90 Tuesday.

This morning, Asian equities show mostly limited losses. Japanese retail trade datacame 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 nowthe 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 thatthe downside in this pair had become more difficult as the market feared BOJ actionin case of a drop to the 85.00 area. However, there was no positive trigger to unlockthe 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 interestrate support to really move away from the recent lows.



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US T-Note future: Nice rebound brings contract again above up-trendline. New ST low in place? Nevertheless, eventual extension

of rebound should have difficulties breaking above 123-24.

Bund: First test of the downside trading range fails but rebound

tepid. Nevertheless we might see some (tepid) follow through onthe upside. Looks to be sell-on-upticks environment. A break(127.12) would be important: Triple top formation

T-Note future (black) and S&P future (orange) intra-day: Strongrebound Treasuries on auction/Beige Book.

EUR/USD: 1.3095 remains within striking distance but no realtest has occurred (yet).

USD/JPY partially returned Tuesday’s gains. Hypothesis of bottom-ing out still holds

EUR/GBP: test of the 0.8317 support area continues



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Calendar

Thursday, 29 July Consensus Previous

US14:30 Initial Jobless Claims (Jul 24) 460K 464K14:30 Continuing Claims (Jul 17) 4500K 4487KJapan01:50 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%UK10:30 Nat’wide House Prices MoM YoY (JUN) -0.3% / 7.0% 0.3B10:30 Net Consumer Credit (JUN) 0.2B 0.3B10:30 Net Lending Sec. on Dwellings (JUN) 1.0B 1.2B10:30 Mortgage Approvals (JUN) 48.8K 49.8K10:30 M4 Money Supply (MoM) (YoY) (JUN F) - - 0.0% / 3.0%EMU11:00 Business Climate Indicator (JUL) 0.39 0.3711:00 Indust. Confidence (JUL) -5 -611:00 Consumer Confidence (JUL F) -14 -14

11:00 Economic Confidence (JUL) 99.1 98.711:00 Services Confidence (JUL) 5 4Germany09:55 Unemployment Change (000's) (JUL) -20K -21K09:55 Unemployment Rate (s.a) (JUL) 7.6% 7.7%France08:45 Producer Prices (MoM) (YoY) (JUN) 0.3% / 3.9% 0.0% / 4.3%Italy09:30 Business Confidence (JUL) 96.4 96.110:00 Hourly Wages (MoM) (YoY) (JUN) 0.2% / 2.6% 0.1% / 2.5%Belgium11:15 CPI (MoM) (YoY) (JUL) - - -0.01%/2.46%Spain09:00 CPI (EU Harmonised) (YoY) (JUL) - - 1.5%Sweden09:15 Consumer Confidence (JUL) 22.1 22.0

09:15 Economic Tendency Survey (JUL) 112.7 112.209:15 Manufacturing Confidence (2Q) - - 009:30 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 Q2earnings

19:20 Fed’s Fisher speaks on US Economy in San AntonioItaly 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- ear td - 1d 2 - ear td - 1d STOCKS - 1dUS 3,00 -0,05 US 0,62 -0,04 DOW 10497,96 -39,81

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

IRS EUR USD (3M) GBP Eonia 0,48 -0,013y 1,712 1,13 1,890 Euribor-1 0,64 0,00 Libor-1 0,571 0,005y 2,190 1,86 2,555 Euribor- 0,90 0,00 Libor-3 0,741 0,0010 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 BRENTEUR/USD 1,3014 0,0003 EUR/JPY 113,51 -0,74 266,16 1166,8 76,16USD/JPY 87,24 -0,6 EUR/GBP 0,8333 0,0003 - 1d 1,70 4,25 0,04GBP/USD 1,5613 0,0001 EUR/CHF 1,371 -0,0075

AUD/USD 0,8976 0,0022 EUR/SEK 9,49 0,00USD/CAD 1,0337 0,0006 EUR/NOK 7,9937 -0,02



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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot beheld liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute arecommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee theaccuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

jul 29 kbc sunrise mkt commentary

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