Sunrise Market Commentary

• US Treasuries continue to move ahead, curve flattens
  Treasuries closed with solid gains as the risk aversion environment is intact. Equities lingering around cycle lows and the carmakers teetering on the brink pushed Treasuries higher. Investors also took profits on steepeners, flattening the curve. The same items will be on the plate today.
• ECB's Stark warns for a crisis in public finances
  Overnight, the Bund moved above the December 2005 highs at 118.88. If confirmed today, this would improve the technical outlook significantly and might also result in some correction on the recent sharp steepening of the European yield curve.
• FX: EUR/USD and USD/JPY continue to trade sideways, EUR/GBP correction slows
  The gyrations on the stock markets continue to set the tone for EUR/USD and USD/JPY trading, intraday. In a broader perspective, both cross rates are settling in a ST consolidation pattern. The rebound of sterling against the euro ran into resistance after softer than expected UK inflation data.

The Sunrise Headlines

• US Equities showed a sharp rebound after testing the five-year lows; Dow/S&P ended 1.83% / 0.98% higher. Asian stocks regained some of their early losses. Nikkei ended 0.66% lower, while Chinese stocks are showing decent gains.
• US carmakers renewed their appeals to Congress for federal aid by warning that their industry is on the brink of disaster as they pleaded for a $25 billion aid package. US House speaker Nancy Pelosi said she does not see Congress meeting again in December if it fails to approve an auto bailout this week.
• The head of Nomura says that he thought the global liquidity crisis was over but that the next problem was how to turn the real economy around.
• Barclays struggles to calm its furious investors after its announcement to raise more than £7 billion in fresh capital from Middle Eastern investors.
• Crude oil ($ 54.49) ended slightly lower after a very volatile session.
• The calendar contains the CBI industrial trends survey, BoE Minutes, US CPI and housing starts and permits.

Currencies: EUR/USD And USD/JPY Continue To Trade Sideways, EUR/GBP Correction Slows

EUR/USD

On Tuesday, the story of EUR/USD trading was very much straightforward. The pair mirrored almost perfectly the intraday gyrations of the major stock market indices. The pair sipped below the 1.2600 mark early in European trading on a poor stock market performance in Asia and during the first hours of European trading. Global sentiment improved going into the US trading session and EUR/USD tested offers in the 1.2700 area just after the close of the European stock markets. The US data (PPI and TIC data) had again no lasting impact on trading and this was also the case for the appearance of Mr. Bernanke and Mr. Paulson before the House Financial services Committee. However, sentiment on the US stock markets remained highly instable and at some point it even looked as if a test of the key 818-support area was in the cards. This also caused EUR/USD to return to the intraday lows. A real test of the lows (in equities) was avoided and both stocks and EUR/USD closed the session off the lows. EUR/USD finished the day at 1.2618, compared to 1.2650 on Monday. Despite the intraday volatility, the EUR/USD trading pattern is losing dynamics and tends to settle in a boring sideways trading pattern.

Today, European eco calendar is again very thin. In the US the CPI, the housing starts and building permits are scheduled for release and the Fed will publish the Minutes of the previous FOMC meeting. We don't expect these events to have a lasting influence on trading. The Housing data have probably the best chance to have some, albeit limited, intraday impact.

For quite some time, negative eco news and risk avers investor behavior have supported the dollar (and the yen) and have weighed on the single currency. This theme was an important factor behind the decline of EUR/USD from highs above 1.60 to the correction low in the 1.2330 area. We are going to hold onto our EUR/USD negative bias longer term. However, since end October the single currency has developed a short-term consolidation pattern. The correlation between EUR/USD and the stock markets is not one-for-one, but (the degree of) risk aversion remains an important factor for EUR/USD trading. We expect EUR/USD to continue to develop within the barriers of this 1.2330/1.3297 consolidation pattern short-term. Whether the bottom of this range will continue to hold will be highly dependent on whether or not the major stock market indices will be able to avoid another down-leg below the recent lows (818 area for the S&P). The jury is still out on this item. However after the relative EUR/USD resilience of late, we have the impression that a forceful down-leg on the stock markets will be needed for EUR/USD to break below the 1.2330 area.

EUR/USD: consolidation continues

Support comes in at 1.2565/44 (Reaction lows hourly), at 1.2512/03 (Week low/Daily envelope), at 1.2448 (Reaction low), at 1.2396/88 (Boll Bottom/ Last week low) and at 1.2331 (Reaction low).

Resistance is seen at 1.2701 (MTMA), at 1.2740/45 (Week high/Daily envelope), at 1.2823/53 (Weekly envelope/Reaction high), at 1.2927 (MT Reaction high),

The pair is neutral territory.

USD/JPY

From a technical point of view, since the last week of September EUR/USD has tumbled from the 1.4866 reaction high to 1.2330 on October 28. High profile intermediate supports have all been taken out with remarkable ease. Over the last three weeks the EUR/USD decline shifted into a lower gear but the pair failed to regain the first important resistance area (1.3259/94) in a sustainable way and has established a sideways trading pattern. Recently, we favoured a sell-on-upticks approach in case of return action higher in the above mentioned trading range. We are holding on to that tactics. We do not yet front run on a break of the downside of the range. In this respect, we are still inclined to reduce/take profit on EUR/USD short exposure in case of dips towards to range bottom and are looking to re-sell in a case of return action higher in the mentioned trading range.

On Tuesday, the drivers for USD/JPY trading were very much the same as the ones that set the tone for EUR/USD trading: global investor/stock market sentiment. Early stock market weakness brought the pair close the 96.00 barrier around noon in Europe. There were again some stock market-driven gyrations later in the session. USD/JPY closed the session at 97.03, compared to 96.43 on Monday.

This morning, Japanese stock markets (contrary the Chinese stock markets) are not able to take any advantage from the positive close in the US yesterday evening. This supports the yen (slightly) this morning. The Japanese all industry activity index came out as expected (-0.1%M/M). Vice finance Minister Shinohara at a conference in Sydney said that he didn't want the key currency country to continue running a huge current account deficit and that he wanted the key currency to be strong. It is not the time to execute high profile, unilateral currency interventions, but the declaration is illustrating the underlying unease in Japan with the current strength of the yen.

Looking at the charts, global market stress hammered the USD/JPY cross rate through the key 103.50 range bottom early October and the pair set a new reaction low at 90.93 three weeks ago. A temporary easing of global market tensions sparked a USD/JPY rebound. The pair set a reaction high in the 100.55 on November 04, but the rebound ran into resistance. Longer-term, we are preferring a scenario of the yen remaining well supported as there is still very little prospect for a sustained improvement in the global economic picture anytime soon. Recently, we indicated that gains beyond the 100.55 reaction high wouldn't be easy short-term. A sell-on-upticks approach remains favoured as long as the pair holds below the 100.55 mark. In a day-to-day perspective, USD/JPY is developing a ST triangle pattern suggesting that there is no strong momentum in one way or another

USD/JPY: no clear directional trend

Support stands at 96.00/95.91 (Reaction lows), at 95.75 (Daily envelope), at 94.48 (Last week low), at 94.00 (Daily +Weekly Boll Bottom) at 93.15 (76 % retracement) and at 90.87 (Year low).

Resistance comes in at 97.40/55 (Reaction high/MTMA), at 98.25 (Reaction high + Daily envelope), at 98.68 (Breakdown), at 98.85 (LTMA), at 99.47 (Reaction high) and at 100.55 (Reaction high).

The pair is in neutral territory

EUR/GBP

Yesterday, the EUR/GBP correction that started at the end of last week lost power. At the start in Europe, the pair extended its decline and set a correction low in the 0.8360 area. However, the pair found a better bit at that level and the softer than expected UK CPI data helped the cross rate to change course. This release apparently faced investors with the possibility of additional BoE interest rate cuts in the near future. Throughout the session, the pair regained the earlier intraday losses and closed the session at 0.8435, little changed compared to the 0.8437 close on Monday.

Today, CBI industrial trends order balance and the BoE Minutes are scheduled for release. It would be highly surprising to see the CBI survey bringing any positive news. The BoE minutes are interesting, but the after last week's inflation report, the framework for the BoE interest rate policy going forward has more or less been set out.

The aggressive BoE rate cut two weeks ago and the negative assessment from the BoE on the UK economy after the publication of the inflation report pulled the trigger for an aggressive sterling selling wave last week. The quick loss of interest rate support and the very negative outlook for the UK economy going forward have caused sterling losing all its attractiveness. The break above the high profile 0.8200 resistance area has made the technical picture outright negative for sterling/positive for EUR/GBP. After the sterling crash of last week, some consolidation/correction kicked in on Friday and at the start of this week. Longer-term we continue to put the risk for additional sterling losses, even from the current levels. The pair must return below the 0.8215 area (uptrend line) to call off the red alert for the sterling. We are watching out how far this correction has to go. Yesterday's intraday U-turn might be a first indication that the ST correction is losing momentum. We are not yet in a hurry, but we are still looking to buy/add to EUR/GBP long exposure in case of addition signals that the correction has run its course.

EUR/GBP: correction slows

Support stands at 0.8426 (Reaction low), at 0.8357 (Week low), at 0.8342/30 (Daily envelope/MT reaction low), at 0.8280 (MTMA) and at 0.8225/15 (Uptrend line/Break-up).

Resistance is seen at 0.8477/97 (Reaction high/Broken STMA), at 0.8528/39 (Breakdown hourly/daily envelope), at 0.8568 (week high), at 0.8617 (Boll top) and at 0.8662 (New high).

The pair is unwinding overbought conditions.

News

US: PPI drops sharply, while core PPI reaches its highest level since 1989

The October PPI inflation data plunged sharply as the headline index dropped 2.8% M/M, while the consensus was looking for a decline of 1.9% M/M. On a yearly basis, producer prices came out at 5.2% Y/Y, after 8.7% Y/Y in September. Excluding food and energy, PPI rose 0.4% M/M, to 4.4% Y/Y, while only a slight increase (0.1% M/M) was expected. This indicates that most of the sharp drop in inflation was due to lower energy and food prices. Most of the increase in core PPI was due to higher prices for capital goods (0.5% M/M) with light trucks gaining 2.6% M/M, railroad equipment up 3.1% M/M agricultural machinery was up 1.1% M/M and civilian aircraft 1.0% M/M higher. The increase for light trucks was due to the start of a new model year. Overall, producer prices plunged sharply due to lower food and energy prices, while core PPI was still rising and reached its highest level since 1989. Inflation will continue to fall in the coming months and we also expect core PPI to come down from its peak.

The NAHB housing market index dropped from 14 in October to 9 in November, while the consensus was seeking for signs of stabilization. The index reached its lowest level since January 1985 as increased tensions in financial markets, rising unemployment and uncertainty about the economic outlook make home builders more pessimistic.

Other: Inflation falls back from its peak reached in September

In the UK, CPI dropped by 0.2% M/M in October, while a slight increase was expected. On a yearly basis, CPI fell from 5.2% Y/Y to 4.5% Y/Y in October. Looking at the details, transport (-2.2% M/M), household (-1.0% M/M), clothing and footwear (- 0.6% M/M) and recreation (-0.4% M/M) showed significant declines, while education (6.2 % M/M) rose sharply. Also core CPI showed an unexpected decline (1.9% M/M from 2.2% M/M). The BoE inflation report indicated earlier that inflation will fall back sharply in the coming months and even risks undershooting the target in the medium term.

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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.