Sunrise Market Commentary

Global bonds end session narrowly mixed
Global bonds traded more or less sideways are various drivers like eco data, supply and Central Bank talk didn't give the market a clear direction. Both the German and the US bond markets are at technical crucial juncture, but we do not expect a break to occur ahead of the US payrolls.
FX: Sterling rebounds
Sterling extended the rebound that started on Monday. The move was mainly technical in nature, but the eco data reinforced the price action. The yen declined a bit further after recent 'verbal interventions' from the Japanese Finance Minister, but we have the impression that the move has no strong legs.

The Sunrise Headlines

US equities close lower (S&P -0.22%) after US consumer confidence disappointed, Asian equities trade mixed this morning
UK consumer confidence rebounds sharply in September to its highest level since January 2008
Australian retail sales surprise on the upside in August pushing to Aussie dollar to new highs at around the 0.88 level, as rate hike expectations become stronger
Overnight, Fed Plosser said 'Fed will have to act well before unemployment rates and other measures of resource utilization have returned to acceptable levels'
Yesterday, Fed Fisher said Fed may need to tighten policy with an alacrity equal in speed and intensity to the accommodation cycle, although the need for a such move could still be some time off
Italian Foreign Minister Frattini said Italy would be 'honored' if Bank of Italy governor Draghi would succeed Trichet in October 2011 at the top of the ECB
The EBRD will ask its members for an extra €10B after its chief economist, Berglof, warns that Eastern European banks have underestimated the value of bad loans
France to cut business taxes by €10B, which will keep the budget deficit at 8.2% in 2010
China's State Council moves to curb overcapacity in industrial sectors, like steel, coke, cement and plate glass
Today, the calendar is well packed with the euro zone flash CPI and the ADP employment report and Chicago PMI as well as a lot of central bank speeches

Currencies: FX - Sterling Rebounds

EUR/USD

On Tuesday, EUR/USD extended the gradual decline that started mid last week. There was not really a big story to explain the move. Recently, most eco data still confirmed to picture of an economic rebound, but several series came out slightly below expectations. Less buoyant eco data and technical considerations slowed the rally on the stock markets and this is also slowing the ascent of EUR/USD. Yesterday, stocks again showed some, albeit limited, losses. The eco data were not that important but painted a mixed and uninspiring picture, too. Especially the weaker than expected US consumer confidence release pushed EUR/USD to a new correction low at 1.4527. However, there was no follow through price action on this (not on the stock markets and not in EUR/USD). The pair closed the session at 1.4587, compares to 1.4622 on Monday.

EUR/USD: correction continues.

Support comes in at 1.4592/78 (Boll Midline/reaction low hourly), at 1.4526 (Week low), at 1.4515/02 (Reaction lows), at 1.4494 (Daily envelope) 1.4438 (MT break-up) and at 1.4426 (Daily uptrend line).

Resistance stands at 1.4633/46 (STMA +daily envelope/Reaction high), at 1.4676/80 (Broken MTMA/Reaction high), at 1.4712/21 (Weekly Boll top/Reaction high), at 1.4766 (Breakdown hourly), at 1.4803 (Reaction high), at 1.4845 (Reaction high/Equality C-wave), at 1.4867 (2008 Sept high).

The pair is in neutral territory.

USD/JPY

Today, the eco calendar is heavy. In Europe, the German labour market data and the CPI are on the agenda. They are interesting but no movers for the currency market. The result of the 12 month tender of the ECB will also get ample attention. The amount of cash asked in the tender will probably be materially lower compared to the previous 12 month tender. In this respect, we expect any potential (negative) impact of excess liquidity on the euro to be limited. In the US, the calendar is very interesting too and these data have probably more market moving potential. The final Q2 GDP release is a bit outdated, but the ADP labour market report and the Chicago PMI are interesting. As indicated earlier, several eco data came out less positive recently. We especially look out whether this will also be the case for the labour market data and in particular for the payrolls that will be published on Friday. The link between the ADP and the payrolls is not one to one, but a negative surprise in the ADP might already cause some additional (stock) market nervousness and might be a good reason for EUR/USD to decline still a bit further. Last but not least, several central bankers a scheduled to speak.

This morning, EUR/USD is being traded a bit higher compared to yesterday's closing levels. Asian stocks are mixed, but better than expected Australian retail sales are supporting the Aussie against the dollar. Apparently this move is also filtering through into EUR/USD with the pair trading again above the 1.46 mark at the moment of writing.

Global context: recently, the swings in risk appetite/risk aversion were the obvious drivers on the currency markets. In this context, the decline of the dollar is considered as a signal of improving global investor sentiment. On top of that, in this low yield environment, the dollar has become the preferred currency to fund carry-trade deals. Lingering uncertainty on the huge US financing needs together with the Fed's intention to run an expansionary monetary policy for a prolonged period of time offer additional ammunition for carry traders to use the dollar rather than other currencies This has put the dollar in a vulnerable position. We don't see many reasons to turn dollar positive before it becomes clear that the Fed will start tightening monetary policy. Last week's Fed decision indicates that this point hasn't been reached. From time to time, some individual Fed members have given some warnings that the Fed might act sooner than usual, but for now those warnings are largely ignored in the FX markets. Any correction on the stock markets might also leave its traces on EUR/USD. Nevertheless, as we expect these corrections on the liquidity driven rally on the stock markets to be limited, we also see the downside in EUR/USD well protected.

Looking at the (technical) charts, EUR/USD cleared the range top at 1.4438/48, improving the picture for EUR/USD. Recently, the pair extensively tested the key 1.4719 December high and even set a new minor high. However, there was no follow- through action on this 'break'. Longer term, we maintain a buy-on-dips approach. However, the ST momentum is not really strong. Recently, we indicated that the 1.4438/50 break-up area would offer a good opportunity to step in again. We're not there yet, but it is still feasible. As soon as stocks resume their uptrend, the 1.5021 target (2nd target double bottom of 1.3739) might come in the picture.

On Tuesday, USD/JPY extended the rebound that started on Monday as the Japanese Finance Minister warned on excessive yen strength. However, the move was already far less forceful than on Monday. The currency pair moved cautiously higher throughout the day and closed the session at 90.09, compared to 89.63 on Monday evening. The jury is still out, but one might get the impression that the impact of Monday's verbal interventions has already petered out.

This morning, Japanese production data (1.8% M/M and -18.7% Y/Y) came out close to expectations. Asian/Japanese stock markets are mixed this morning and offer not clear guidance fro currency trading. There is still market talk on end of quarter hedging, triggering some yen buying. Investors are also looking forward to tomorrow's Tankan survey.

Global context: USD/JPY reached a reaction high in the 97.80 area early August. Despite a positive global investor sentiment, the dollar could not hold on to its gains against the yen. This suggested underlying dollar weakness. The link between USD/JPY and global investor risk aversion/risk appetite became less tight and has now even reversed. The dollar (and not the yen) gradually has become the preferred funding currency for carry trades. So, the price action in USD/JPY more or less joined the global dollar trend (decline). The long-term trend obviously remains USD/JPY negative. However, recently, we turned more cautious on USD/JPY shorts on technical considerations (the 91.73/90.00 area was a high profile support level). On top of that, the change in talk from the Japanese authorities also caused profit taking on yen long positions short-term. We still look to sell in case of a more pronounced up-tick. The 92/93 area might be a good entry point if the correction would go that far. It will be interesting to see how quick the Japanese Fin Min will react in case of a new rebound of the yen. The 87.10 (year low) area remains the next high profile target on the downside for this pair.

USD/JPY: yen-correction short-lived?

Support is seen at 89.63/41 (Reaction low), at 89.25/15 (Boll bottom/daily envelope + Reaction low hourly), at 88.23/00 (Reaction low/Weekly envelope) at 87.71(Broken daily channel top), and at 87.10 (Year low).

Resistance comes in at 90.41 (ST high), at 90.76/83 (Weekly STMA/MTMA), 91.28 (Boll midline) and at 91.87 (38% retracement).

The pair is unwinding oversold conditions.

EUR/GBP

On Tuesday, sterling eked out quite a decent rebound, against the dollar and even more against the euro. We see this mainly as an unwinding of heavily overbought conditions in the EUR/GBP cross rate. However, the news flow supported the price action, too, as the market focused on a decent number of mortgage approvals and especially the better than expected CBI distributive trades report. On top of that, headlines coming from an economist meeting at the Bank of England dampened speculation that Bank might change its remuneration for commercial banks' reserves. As such, markets more or less ignored the revision of the Q2 GDP, which was in line with expectations (-0.6% Q/Q) and the Q2 current account, which showed a wider than expected deficit, as the data are a bit outdated. So, EUR/GBP dropped from levels above 0.92 to set an intraday low in the low 0.91-area at the start of the afternoon session. Later, the pair settled in a sideways trading range and closed the session at 0.9139, compared to 0.9206 on Monday.

Overnight, the GFK consumer confidence came out much better than expected at - 16 from -25 in August. Until now, the reaction of sterling was remarkably limited/ disappointing. However, yesterday there were already rumours on better than expected figure. Later today, there is a speech of BoE Miles on monetary policy and on the economic outlook.

Global context: Since mid June, the EUR/GBP cross rate entered a consolidation pattern. Sterling had come off from distressed levels at the end of last year. This move was supported by growing evidence that the decline in economic activity in the UK had moderated. However, lingering uncertainty on the BoE's quantitative monetary policy capped the rebound of sterling. The August BoE decision to raise the asset purchase program to £175B and Governor King's call for an even greater effort indicated that the Bank intended to maintain a loose policy for a prolonged period of time. This triggered a new sterling selling wave. At the September meeting, the BoE took no additional policy steps. Nevertheless, the (monetary) picture stays sterling negative and more BOE talk on the positive effects of sterling weakness for the UK economy reinforced investors' feeling that the BOE was quite happy with the course of events. We have a long-standing sterling negative view and don't feel any need to change it. However, recently we advocated some caution on the recent steep EUR/GBP rise as a key technical level had been reached (0.9082). There is still no good reason to row against this sterling negative tide. However, in a day-to-day perspective we still wait/hope for the current correction to go somewhat further (eg. towards the 0.9082/0.9000 area) before adding to EUR/GBP long exposure

EUR/GBP: sterling performs technical correction

Support comes 0.9114/04 (Daily envelop/Reaction low), at 0.9090 (23% retracement), at 0.9061 (Break-up daily), at 90.42/40 (MTMA/Break-up) and at 0.9010 (Break-up).

Resistance is seen at 0.9149/61 (Reaction high/broken STMA) at 0.9184 (Breakdown), at 0.9210 (Reaction high/daily envelope), at 0.9272 (Boll Top) and at 0.9304 (Reaction high).

The pair is unwinding overbought conditions.

News

US: House prices rise

S&P house prices showed in July a third consecutive rise, suggesting that the housing market is on the mend. The 20 cities index rose to 144.23 from 141.94. In yearly terms, the decline slowed to -13.3% following a 15.4% decline in June. The increase was broad-based with only two of the twenty metropolitan areas, notably Seattle and Las Vegas, still recording a monthly decline.

September Consumer confidence index (Conference Board) unexpectedly slipped to 53.1 from 54.5 previously with both the present conditions and the expectations sub-indices contributing to the lower headline reading. The market was looking for a rise to 57. The report is at odds with a similar sentiment report from the Michigan University that showed a decent improvement in September and with some other reports. It might also be more a correction of the steep increase in August than a signal consumer confidence is again on a downward path. While both sub-indices contributed to the decline, it was principally the present situation index that saw the biggest decrease to 22.7 from 25.4 previously and is barely above the cycle low of 21.9 reached in March. The expectations index shed only 0.5 points to 73.3, which is still way above the low of 27.3 in February. So, while consumers remain optimistic about the outlook, they don't see much of an improvement yet. The details show that consumers' appraisal of the labour market deteriorated somewhat, which might be an indication about the outcome of Friday's payrolls report.

EMU: Economic confidence improves, CPI declines

The EU Commission confidence survey confirmed an improving of sentiment in September. The outcome was very close to expectations. The headline economic confidence index rose by 2 points to 82.8, the sixth consecutive monthly rise bringing the index to its highest level since October 2008. It was however the smallest monthly increase since it reached its bottom one year ago. The index is also still 16 points from its 20-year average. The consumer, industrial and service confidence all contributed evenly to the advance of the headline index. At the margin the survey was somewhat better than the PMI survey, but the latter slightly leads the former and suggests that the October economic confidence survey may show a further slowing of the improvement. The EU business climate indicator for September confirmed the PMI survey by showing a less than expected gain to -2.07 from -2.21 previously and compares to a consensus estimate of -1.92.

The Retail PMI index rose slightly to 48.6 in September from 47.1 in August. The index is near its long term average (49) and up from a 40.6 low in November 2008. In recent months, the improvement stalled.

The Belgian and Spanish CPI reports for September confirmed the German report, released on Monday that showed that prices actually declined. Indeed, Belgian CPI declined by 0.26% M/M and by 1.19% Y/Y, following a rise by 0.31% M/M and a decline by 0.78% Y/Y previously, while the flash Spanish HICP declined to -1% Y/Y from -0.8% Y/Y previously

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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.