Sunrise Market Commentary

• US Treasuries rally on weak eco data, tumbling equities and a strong 5-year Note auction
  Very nice run of Treasuries suggesting that the downside is now better protected. Eco weakness may also today pop up, while equities are the usual wildcard. Yesterday's ugly equity session suggest that a sell-on-up-ticks mentality may take hold.
• Bund turns around, but more gains needed to get really relieved
  EMU business data suggest that a recession scenario can no longer be completely excluded. Calendar is uneventful today but expected equity weakness will support the Bund early on.
• FX: Conflicting signals
  Very poor European eco data caused EUR/USD to set a ST low, but as the US data were far from convincing too, the dollar could not hold on to its gains. On top of that, the US currency no longer receives support from declining oil prices. Wednesday's rebound in sterling proved to be very short-lived.

The Sunrise Headlines

• US Equities drop (Dow/S&P -2.4%/-2.3%) led by financials, as existing home sales fall more than expected, Asian stocks follow downward trend on weaker than expected Samsung Electronics profits.
• National Australia Bank Ltd books another A$ 380 million ($ 798 million) of losses as a result of exposure to bad US loans, sending its shares 13% down.
• UBS AG was sued by the New York state accusing them of committing a multibillion dollar fraud by steering broker clients into auction-rate securities that became impossible to sell once the credit market tightened.
• German import prices rose a higher than expected 8.9% Y/Y led by surging energy costs.
• Japan's CPI rose at the fastest pace in a decade due to high oil and food prices, but most other prices were stable.
• Crude ($ 127.00) rose on concerns of possible supply disruptions in Iran and Nigeria.
• Euro zone M3 money growth, UK Q2 GDP and durable orders and new home sales in the US on the calendar today.

Currencies: Conflicting Signals

On Thursday, EUR/USD extended its downward correction, but the pace of the decline slowed. Contrary to the previous days, yesterday's move should be considered as euro weakness rather than dollar strength. Indeed, weaker than expected European business sentiment indicators (PMI's and German IFO release, amongst others) supported the market view that the economic slowdown that started in the US reaches the Euro-area, too. The deterioration won't stop at the periphery (the likes of Spain and Ireland) but now also the core countries like France and Germany show a marked slowdown in economic activity. The immediate impact from these data on the ECB policy going forward is not that clear, but with the EMU PMI's now well below the 50 boom-or-bust mark, the risk for the single currency losing interest support (pricing out of additional interest rate hikes or even pricing in interest rate cuts further out) is growing. To be honest, the market reaction in EUR/USD on these European data was not really that spectacular, but with the pair holding close to the 1.57 mark, the recent correction was confirmed. Later the session, the US data (claims and existing homes sales) were weaker than expected but had only a limited impact on EUR/USD and this also applies to the steep drop in US equities. EUR/USD closed the session at 1.5677 compared to 1.5698 on Wednesday.

Today, EMU money supply data and the US durable orders are on the agenda. The later is the most important from a market point of view.

Last week, EUR/USD tested the top of the MT term sideways trading range as resurfacing credit concerns (GSE's) weighed on the US currency and the pair even briefly traded above the previous highs at 1.6020. However, there was no follow-through price action to confirm this break. An easing of the credit concerns and even a more sharp decline in oil prices eased the pressure on the dollar. The eco data from the US or Europe only played a minor role in that move. Recently, we advocated that there is not a compelling reason for EUR/USD to engage in a new strong up-leg beyond the 1.6020/40 range tops as we expect European data to show ever growing signs of weakness too, while in the US the Fed apparently has the intention to raise rates as soon as possible. We see yesterday's data as confirming our view even if we have to admit that the impact of the European data on EUR/USD was rather subdued. Short-term oil and also the new developments in the credit crisis will continue to leave their trace on the currency markets, too. With respect to the latter, one can raise the question whether banks outside the US (also in Europe) don't have some catching up of bad news to do. If so, this aspect of the credit crisis shouldn't be that much of a negative factor for the dollar anymore.

EUR/USD: slightly lower on poor European data

Support stands at 1.5661 (Reaction low hourly), at 1.5627/11 (Reaction low/ Low 07 July + Boll Bottom) at 1.5593 (Daily envelope//62 % retracment ST), at 1.5521 (Starc bottom) and at 1.5488 (Target channel break).

Resistance is seen at 1.5713 (Daily envelope + ST high), 1.5755/64 (STMA/Reaction high) 1.5782(Neckline double top), at 1.5814/27 (Broken MTMA/Breakdown daily) and at 1.5884 (Broken channel top)

The pair is in slightly oversold territory.

USD/JPY

Last week and early this week, we argued that EUR/USD had to move away from the range top soon and in a convincing way to avoid the risk of an additional USD stoploss selling move. The sharp decline in the oil price helped this scenario to come true this week. On Tuesday, the pair fell below the ST channel bottom (today at 1.5884) and below the neckline of a ST double top. This is a ST USD positive. We hold on to our view that the topside in this pair should hold and maintain our cautious sell-onupticks approach in this pair. The 1.5611 correction low/neckline is the first support on the downside. The target of the channel break comes in at 1.5488.

The rebound in USD/JPY apparently is running out of steam. The most powerful driver for this rebound, the decline in the oil price, slowed yesterday. On top of that, sentiment on the equity markets turned negative again, and contrary to EUR/USD, the poor US data also had a (slight) negative impact on this pair. So, USD/JPY started the session in Asia close to 108 mark but gradually declined throughout the day to close the session at 107.33.

The combination of a correction in USD/JPY and on top of that EUR/USD losing some ground on the poor European data finally caused EUR/JPY to move away from the 170 area.

This morning, Japanese CPI data painted somewhat of a mixed picture with the July Tokyo CPI coming out at a lower than expected 1.6 %. However, the June National CPI rose to 2.0 %. While the core reading (ex food and energy) remains at a very low 0.1% Y/Y. So, with the economic outlook deteriorating, a BOJ rate hike is not yet around the corner.

Looking at the charts, the turmoil on global markets caused USD/JPY (and EUR/JPY) to temporary drop below first important support levels (USD/JPY 104.99; EUR/JPY 166.09) last week. However, this signal was soon reversed. USD/JPY is now again in the previous sideways trading range (cf. graph). Oil, (the easing of?) credit concerns and the global stock market performance remain the key drivers for this pair. We had/have a neutral view on USD/JPY. A sustained break above the 107.75 reaction high (= neckline double bottom) would have materially improved the technical picture in this pair. Over the previous days, we indicated that we where not in hurry to jump on the USD/JPY rebound as that move was highly depended on the oil price. On top of that, key technical resistance levels were/are lining up (107.75 tested and 108.58; cf. graph). Yesterday's rejected test of the first important resistances suggests that topside has become more difficult short-term. Medium term we remain neutral on USD/JPY as long as the 103.77/108.58 range holds. In a day-today perspective we might see the pair drifting lower in the established range.

USD/JPY: First test topside rejected

Support stands at 106.53 (Broken MTMA/Boll Midline), at 106.03 (Week low), at 105.95/84 (MT reaction low/MT break-up), at 105.65 (Weekly envelope), at 105.18/98 (Break-up daily/Boll Bottom).

Resistance comes in at 107.46 (Break-down), at 107.93/99 (Weekly envelope/week high), at 108.12 (Boll Top), at 108.43 (Reaction high) and at 108.58/67 (Range top/daily envelope)

The pair is unwinding overbought conditions.

EUR/GBP

The sterling had no chance to enjoy its post-Minutes strength for long. Yesterday, the UK currency faced a new down to earth experience after the publication of (much) weaker than expected UK retail sales. This figure suggests that the strong June figure was nothing more than a one-off outlier and that the outlook for the UK economy remains murky. Admittedly, the European data were far from exiting, too, but after the strong (overdone) sterling gains on Tuesday, UK currency was hit harder by the combined data than was the case for the single currency. So, EUR/GBP opened the session in the 0.7850 area; it already felt some upward pressure going into the data and after the release the pair settled in the 0.7890 area and also closed the session in that area.

Today, the advance reading of the Q2 GDP figure will be released. The market already expects a soft 0.2% Q/Q and 1.6% Y/Y reading and not details will be available. We don't have strong view on the outcome of the figure and thus join the consensus.

Since mid April, EUR/GBP developed a very uninspiring consolidation pattern (0.7766/0.8098). Several attempts to move higher ran into resistance and Wednesday's sharp correction on the BOE Minutes brought the pair close to a first important support level. However, also this test was rejected, leaving the short-term sideways trading range unharmed. In a longer-term perspective we hold on to our sterling skeptic attitude. Playing the 0.7831/0.8034 trading range continues to be the most logical option for now.

EUR/GBP: Test first important support rejected

Support comes in at 0.7885/79 (Reaction lows hourly), at 0.7870/61 (Breakup hourly/Daily Boll Midline), at 0.7849/39 (Daily envelope/Week low) at 0.7831 (MT reaction low) and at 0.7766 (Reaction low).

Resistance stands at 0.7907/14 (Daily envelope + ST high)/Break-down), at 0.7922/32 (LTMA/MTMA +Boll Midline), at 0.796074 (Reaction high/Week high), at 0.8003 (Boll Top).

The pair is unwinding oversold conditions.

News

US: Housing market at its lowest level in 10 years

Existing home sales fell more than expected in June (2.6% M/M) to 4.86M after rising 2.0%M/M in May to 4.99M. Single family homes, the key measure, fell 3.2% M/M while condos rose by 1.7% M/M. Regionally sales were lower in the Northeast, Midwest and South, but higher in the West. The months' supply on the market widened to 11.1 after reaching 10.8 in May. Looking at prices, both the median and average price for an existing home were higher on a monthly basis, while the median price was 6.1% down against June 2007 and the average price was 6.8% Y/Y down. This lowest level of sales in 10 years and still bloated inventories shows that the housing market is deteriorating further and a recovery is not yet on the horizon.

Initial claims rose by a higher than expected 34 000 to 406 000 last week, the highest of the current cycle, while the previous figure was upwardly revised from 366 000 to 372 000. Continuing claims, which are reported with a one week lag, came out better than expected falling 9 000 to 3 107 000. After better-than-expected data in the previous two weeks, probably on distortions, these figures show that the labour market weakening.

EMU: Economy is deteriorating fast

In July, the euro zone services and manufacturing PMI's continued their downward trend. The manufacturing PMI came out clearly below the expectations at 47.5, against 49.2 last month. The services PMI showed a more modest decline falling from 49.1 in June to 48.3 in July. Looking at the details of the manufacturing sector, both output (46.9 from 49.6) and new orders (44.0 from 47.3) fell sharply. Employment, another important sub-index, fell from 49.7 in June to 48.6 in July. Prices were again higher with input prices rising from 70.8 to 72.9 and output prices from 56.4 to 57.3. Details of the services PMI show falling employment, new business and outstanding business. More surprising are the (slightly) falling prices: prices charged from 54.6 to 54.1 and input prices from 65.7 to 65.2. The PMI's indicate that the euro zone growth is further cooling down and the strong currency weights on the economy. This trend is confirmed by the business confidence indicators in France, Italy and Belgium, which were all sharply deteriorating.

In Germany, the IFO report showed a similar trend with a sharp decline in business confidence from 101.2 in June to 97.5 in July, clearly below the expectation of 100.1. Both sub-indices came out lower with the expectations falling from 94.6 to 90.0 and the current assessment from 108.3 to 105.7. Business climate was deteriorating in all sectors, but especially retail (-20.4 from -6.7) and wholesale trade (-7.3 from 2.0) underperformed. The idea that stronghold Germany would keep the EMU on track is put seriously into question

Other: UK retail sales downwardly surprising

In the UK, June retail sales fell 3.9% M/M (2.2% Y/Y) while a more modest drop was expected. This is the fastest monthly drop since series began in 1986, while in the previous month retail sales rose at its fastest pace since the start of the retail sales series. The details show that sales were only rising in non-specialised stores, while the sharpest decline was for the textile, clothing and footwear sector. These data confirm our expectations that the May figures were only an outlier and were expected to fall again, but such a strong drop exceeds also our forecasts.

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Disclaimer: 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 be held 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 a recommendation 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 the accuracy 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.