Sunrise Market Commentary

• US Treasuries drop on strong durable orders, breaching key support levels
  Stronger durable orders raised optimism about the eco outlook, increased rate hike expectations and pushed Treasury yields above key resistance levels across the curve, deteriorating the technical pictures (confirmation still needed today). The calendar is less interesting today.
• European bonds testing key support levels
  Yesterday's trading indicated that sentiment is still very bearish. 2- and 10-year yields are now close to key resistance levels at respectively 4.25% and 4.35%. In the US, similar levels have been broken yesterday. If confirmed, this may result in another up-leg in European yields too.
• Dollar continues to fight back
  The dollar again recorded some decent gains against the euro and the yen. Oil helped the US currency, but the dollar managed to maintain most of its gains even after oil rebounded. This suggests a gradual improvement in the dollar sentiment short-term.

The Sunrise Headlines

• US equities ended moderately higher on Wednesday, as rebound in oil spurred a late rally in energy shares and materials did well on stronger durable orders.
• Asian equities mostly higher overnight, with Japan and Korea outperformers
• Slovakia revalues its currency against the euro, ahead of its EMU entry. Central parity is now 17.6472% stronger at EUR/SKK 30.1260
• Banks announce the creation of a central clearing house for derivatives to mitigate counterparty risk and thus diminish systemic risk
• Dow Chemicals raises the prices of all its products by up to 20%
• AIG may seek 5-to-10 Bn. $ to keep its rating, according to Citigroup report; Ambac tumbled 9% to record low after its revealed more (unrealized) losses on CDO's
• Fed governor Mishkin will resign from Fed at the end of August
• Crude oil traded volatile (5 $ range) on Wednesday to close up more than 2 $ at 131.03 on renewed threats on Nigerian oil supply, but pulled back overnight (130.40 $)
• UK Nationwide house price index drop most on record
• EMU M3 money supply and confidence data highlights of the day

Currencies: Dollar Continues To Fight Back

On Wednesday, the dollar gained further ground against the single currency. The European eco data were mixed with the French consumer confidence much weaker than expected but German inflation figures coming in higher than expected. However, oil was again the most important driver for the dollar and at least during the morning session in Europe, lower oil prices continued to support the US currency. In the US, the durable orders came out better than expected and made EUR/USD setting intra-day lows in the 1.5610/15 area. However, we have to admit that the release didn't cause that much of additional dollar strength, also as at that time oil tried to fight back. Nevertheless, the dollar made again some decent gains in a daily perspective. EUR/USD closed the session at 1.5639 compared to a 1.5691 close on Tuesday.

Today, the calendar contains sentiment indicators from the European Commission, the M3 Money supply data and the Retail PMI. In the US, the preliminary GDP data and the claims will be released. The US data are not the most important ones. The US Q1 GDP will probably be revised a bit higher. As such, the market shouldn't react too much to such a revision. If they should react, this would tell us more about market sentiment (growing slightly more dollar positive?) than about the data. In Europe it will also be interesting to see the pace of the decline in the EC sentiment indicators and whether a more pronounced decline, if it occurs, would trigger some additional profit taking in the single currency.

Recently, the sentiment was euro positive but the inability to clear the 1.5815 shortterm range top triggered some profit taking in this pair. The correction in oil prices was also a good excuse to close dollar short/euro long positions. On top of that, one might assume that the (interest rate) markets already price in a lot of euro supportive news as they point to a decent chance of an ECB rate hike towards the end of the year. On the other side of the Atlantic, we also monitor the Fed Fund futures as hawkish Fed talk, like Fisher overnight, makes markets pondering the chances of an early Fed rate hike, too.

In a medium term perspective, we have a neutral bias on EUR/USD. We expect the pair to continue trading in the 1.5285/1.6020 range as long as visibility on the economic picture in the US and Europe remains low. Short-term, the intermediate resistance at 1.5815/20 (reaction high) proved a hard nut to crack. Over the previous sessions, we advocated a sell-on-up ticks strategy in a day-to-day approach. We hold on to that attitude, even if the rebound in oil could make things a bit more complicated today. A sustained drop below the 1.5600 Neckline would suggest return action to the lower part of the medium term trading range.

EUR/USD: dollar still supported by oil

Support stands at 1.5584/82 (Week/daily envelope), at 1.5566/61 (Targets double top), at 1.5537 (MT Break-up) at 1.5488/84 (62% retracement/ MT reaction low).

Resistance is seen at 1.5669 (Breakdown), at 1.5692/98 (Daily envelope + STMA/Broken flatg bottom), at 1.5760/76 (Rection highs) and at 1.5819 (Week high)

The pair is in neutral territory.

USD/JPY

Yesterday, USD/JPY took a rather poor start to day as Japanese stock markets failed to join the improving sentiment in the US and Europe. However, the stock market gains in Europe and even more the steep decline in oil prices also triggered a rebound in USD/JPY and the pair set an intraday high in the 105.30 area immediately after the US durable orders release. Later in the session, the hesitant start of the US stock markets and the rebound in oil prices blocked the USD/JPY rebound and the pair closed the session at 104.69 compared to a 104.24 close on Tuesday.

This morning, Japanese retail data came out weaker than expected but the Nikkei did catch up with the gains in other markets over the previous two days. However, this has no big impact on USD/JPY trading.

After a rebound from mid March to early May, USD/JPY settled in a narrow trading range throughout the month of May. We turned neutral on USD/JPY as a break above the range top in the 105.69 proved very difficult. On the downside, a test of the 102.55 neckline was rejected last week and can be seen as an indication that the downside in this pair is still rather well protected. In a day to day perspective, we continue to favour to play the 102.55/105.69 trading rang with a buy-ondips approach. For a sustained break of this level probably some external help from oil or stocks (or both) is needed. Nevertheless, we have the feeling that the underlying sentiment gradually grows a bit more dollar positive.

USD/JPY: higher in the range

Support stands at 104.43/38 (Reaction low/Neckline double bottom), at 104.14/08 (MTMA/STMA+ Daily envelope), at 103.80/63 (LTMA/3th uptrend line).

Resistance comes in at 105.26/32 (Daily envelope/ST high), at 105.44/59 (Pevious reaction high + Boll Top) at 105.69/72 (Reaction high/1st target double bottom), at 106.06 (2nd target double bottom), at 106.38 (38% retracement).

The pair is in overbought territory.

EUR/GBP

Yesterday, there were no important eco data in the UK but this didn't prevent sterling from rebounding quite strongly against the single currency. In technical, order-driven trading, cable didn't really track the decline in EUR/USD and this caused EUR/GBP to drop below the bottom of the short-term trading range. EUR/GBP closed the session at 0.7894 compared to 0.7939 on Tuesday.

Today, the UK calendar contains the CBI distributive trades report. This morning the UK Nationwide house prices came again out very weak and this helps EUR/GBP to regain some ground on yesterday's correction. However, we have the impression that, at least for now, sterling grows a bit more resilient to negative news.

Since mid April, EUR/GBP develops a consolidation pattern after the steep sterling losses of the previous months. We took profit on the EUR/GBP latest rebound last week, as we doubted the overall short-term upside potential of the euro. We remain sterling negative longer term. However, short-term we have the impression that markets have grown somewhat less negative on the sterling and a EUR/USD correction also tends to filter through into EUR/GBP trading. EUR/GBP yesterday dropped below the 0.7920 area/short term range bottom and if confirmed this could be an indication that the correction in this pair has somewhat further to go. On the technical charts, the currency pair also paints an hourly Head and shoulders pattern. This also suggests some short-term downside in this pair.

EUR/GBP drops below 0.7920 area

Support comes in at 0.7894 (Reaction low), at 0.7880/77 (Yesterday low/MT reaction low), at 0.7864 (Break-up + daily envelope), at 0.7860/56 (1st target HS), at 0.7835 (Boll bottom) and at 0.7820/10 (08 May low/3th target HS).

Resistance stands at 0.79 26/36(Daily envelope/LTMA), 0.7945 (MTMA), at at 0.7984/88 (ST high/reaction high), at 0.8011/18 (Reaction high/Boll top), at 0.8034/38 (Reaction high/target flag break), at 0.8051 (Reaction high).

The pair is in neutral territory.

News

US: Core Durable orders rebound in April

Durable orders declined a smaller-than-expected 0.5% M/M in April, after falling 0.3% M/M in March. Falling transportation orders (-8% M/M) were the main culprit and higher energy prices are certainly an important factor behind the weakness in e.g. car orders. On a yearly basis, durable orders were down 3.4% in April, following a 0.9% decline in March. However, orders less transportation were up a firm 2.5% M/M in April, after rising 1.7% M/M in March. Shipments of non-defence capital goods less aircraft, a predictor of business investment in equipment & software, rose by 0.5% M/M following a 0.8% M/M rise in March. The series stands now 2.3% above Q1 average, suggesting moderate growth of investment in Q2 and the sector (together with net exports) might prevent Q2 GDP growth from showing an outright contraction.

ICSC weekly retail sales stabilized in the most recent week, after falling 0.4% W/W in the previous one. On a yearly basis, sales are up 1.5%, following a 1.6% reading previously. The story of the weakness in consumption is of course well documented (high energy prices, housing slump…). However, until now there are little signs that the tax rebates is having much of an impact either.

EMU: Weak eco data and rising German inflation

French consumer confidence index plunged in May another 3 points to -41, defying expectations for a stabilization. The index is at its lowest level since at least 10 years.

The problems in the Spanish housing market are spiralling out of control, if the most recent figures are correct. House transactions fell 38.6% Y/Y in March, after falling 24.4% Y/Y in February and mortgages on houses fell 39.7% Y/Y, after dropping 25.8% Y/Y previously.

German HICP inflation rose by 0.6% M/M and 3% Y/Y in May, according to a preliminary report, following a 0.3% M/M drop and a 2.6% Y/Y rise in April. The overall details will be available when the final report is published, but the details of the Lander CPI's show that mainly energy was still behind the strong rise in inflation. The underlying picture looked quite subdued.

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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.