Sunrise Market Commentary

• US Treasuries go through the roof in frenetic trading. Correction ahead?
  Treasuries leapt upward, pushing yields across the curve to eye-popping levels. Crashing equities, weak eco data, but also dislocations and hedging in illiquid markets drove the action. Especially the 42 basis points drop in 30-year yields were affecting by the strange behaviour of the swaps. We think the market is now ready for correction.
• ECB's Mersch suggests ECB will continue to cut rates by 50 bps
  Following yesterday's ECB's non-monetary policy meeting, ECB's Mersch suggested that ECB will continue to cut rates by 50 bps. This has increased the risk on some profit-taking at the short end, as markets have been pricing in a 75 bps rate cut at the December meeting and 2-year yields tested important support at 2%.
• FX Major cross rates react rather mute to elevated level of stress on other markets
  USD/JPY and EUR/USD remained under pressure due to global market stress and risk avers investor behavior. However, the losses, especially in EUR/USD, were not that important and are suggesting underlying euro resilience. The rebound of the sterling against the euro ran into resistance despite better than expected UK retail sales

The Sunrise Headlines

• US equities faced a volatile session and ended sharply lower. The S&P closed below the 2002 low led by energy shares and financials. Asian stocks had a weak opening but regained their early losses. Nikkei ended 2.7% higher.
• Shares of Citigroup lost more than 50% this week on worries that it has not enough capital to withstand billions of dollars of potential losses. According to the WSJ, executives are weighing the possibility of auctioning off pieces or even selling the company.
• Democratic leaders blocked immediate action on aid to carmakers and ordered them to make a case for the next week. Pelosi said: 'until they show us the plan, we cannot show them the money'.
• The Bank of Japan decided to keep its interest rate unchanged, but warned of downside risks to the Japanese economy and said the hard times could last for a while with inflation pressures easing. Yesterday, the Swiss Central Bank lowered its benchmark interest rate by 100 basis points to 1%.
• Australian banks are planning to raise less costly funds in Europe after the government has finalized a wholesale funding guarantee. Investors are speculating on an aggressive rate cut, by more than a full percentage point.
• Crude oil tumbled below $50 a barrel, its lowest level in three-and-a-half year, as the deepening recession is cooling demand.
• Today, the calendar contains the euro zone PMI figures.

Currencies: Major Cross Rates React Rather Mute To Elevated Level Of Stress On Other Markets

EUR/USD

On Thursday, EUR/USD after all experienced a rather calm session as trading developed more or less sideways in a 1-big figure trading range roughly between 1.2490 and 1.2590 for most of the day. Given the high volatility and stress in almost all other markets, this relative calm was a bit remarkable. Intraday, 'usual' factors still played some role. The pair tried to move higher early in US trading, but the global market reaction on very poor US initial claims (decline in the oil price and in the stock market) sent EUR/USD back to the 1.25 barrier. Later in the session, the gyrations in the stock markets continued to set the tone for trading. The late sell-off on the US stock markets hammered the pair through the intraday (Asian) bottom around 1.2475 and the pair closed the session at 1.2453 compared to 1.2489 on Wednesday. However, we continue to hold on to our view that the single currency is doing rather well in the current environment. This is also being illustrated this morning as pair has already regained the 1.25 barrier on the back of an, albeit fragile, stock market recovery in Asia.

Today, US calendar is empty. In Europe, the preliminary PMI data for the month of November and the French consumer spending data are on agenda. Especially, the PMI figures will be closely monitored. It is of course very difficult to expect any goods news from these data. Nevertheless, it will be interesting to see whether or not the euro reacts to negative news from the euro-zone area. We will also keep an eye on the speeches from ECB members in the wake of yesterday's non-monetary policy meeting. It is not our favorite scenario, but markets will look out whether they open the way for more bold action (possibility on more than 50 basis points rate cut in December). The speed of additional rate cuts is an ambiguous factor for any currency. However, at the current juncture we are seeing the gradual approach of the ECB a cautiously supportive factor for the single currency.

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 indicators of risk aversion and economic stress still exists, but the euro is gradually showing more resilience. The bottom of the consolidation pattern between 1.2330 and 1.3294 is still within striking distance, but despite the heavy global market stress (the S&P closed below the key 768 support) no real test has occurred yet. The jury is still out on this item, but price action during last week has shown that probably a high profile event will be needed for EUR/USD to clear the 1.2330 barrier. It is still early days, but we also stay open minded on the established trading theme that global bad new is also bad news for the single currency. This is also no low of mathematics.

EUR/USD: lower in the range, but no test of the bottom yet

Support comes in at 1.2426 (Week low), at 1.2388/82 (Last week low), at 1.2353/43 (Daily envelope/Boll Bottom), at 1.2331 (Reaction low) and at 1.2300(Target Channel break).

Resistance is seen at 1.2547 (STMA/Daily envelope), at 1.2593 (Reaction high hourly), at 1.2638 (MTMA), at 1.2687 (Boll midline), at 1.2813/23 (Reaction high/Weekly envelope), at 1.2853 (MT Reaction high) and 1.2953 (LTMA).

The pair is in oversold 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 long term. However, over the past week; we also have been advocating not to front-run on a break below the range bottom and we were inclined to take partial profit in case return action towards to bottom of the range. In a day-to-day perspective, we have the impression that the chances are rising for a more pronounced rebound in EUR/USD. So, additional profit taking/protection on EUR/USD shorts could be warranted and we're not in a hurry to reinstall EUR/USD shorts.

On Wednesday, USD/JPY continued to trade according to the usual logic (swings in risk aversion). The swings in the stock market and the (poor) US data (claims) set the tone for trading. The late stock market sell-off in the US caused USD/JPY to close the session at 93.69, compared to 95.73 on Wednesday. This is still a decent loss, but as we mentioned for EUR/USD, the damage for USD/JPY could have been even bigger. The year low hasn't come in the picture yet.

This morning, the BoJ left its interest rate unchanged at 0.30 %. However, the bank suggested additional 'technical' measures to ease funding pressures for the corporate sector. Japanese finance Minister Nakagawa warned that authorities must be ready to deal with big swings in markets as they are undesirable. This statement of course also applied to the recent strength of the yen. Asian/Japanese stocks try to resist the sell-off in the US yesterday evening and this is helping USD/JPY to recoup some of yesterday's losses.

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. 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 this 100.55 mark. The ST technical picture is still yen positive, but in a day-to-day perspective we have the impression that downside in USD/JPY might become more difficult short-term. Partial profit taking on USD/JPY shorts might be considered.

USD/JPY: yen extends gains, at least for now

Support stands at 93.55/46 (Week low + Boll bottom/MT break-up), at 93.15/02 (76 % retracement/Daily envelope), at 91.46 (Daily Starc bottom) and at 90.87 (Year low).

Resistance comes in at 95.60 (STMA), at 96.23 (Reaction high), at 96.72 (MTMA), at 97.11 (Boll Midline) and at 98.25/29 (13 Nov high/LTMA).

The pair is in oversold territory

EUR/GBP

Yesterday, EUR/GBP made a nice rebound after the correction that had occurred earlier this week. This might have been a bit of a surprise as the UK retail sales came out less negative than fear by the markets. This only illustrates that this is very much an order driven market, with the swings in cable and EUR/USD causing erratic price action in EUR/GBP. EUR/GBP closed the session at 0.8456 compared to 0.8355.

Today, the UK calendar is empty

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 a lot, if not 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 correction has kicked since Friday. Longer-term we continue to put the risk for additional sterling losses. The pair must return below the 0.8215/40 area (Break-up/uptrend line) to call off the red alert for the sterling. We still need confirmation, but yesterday's EUR/GBP rebound might be a first indication that the recent (sterling positive) correction has run its course.

EUR/GBP: has the correction run its course?

Support stands at 0.0.8424 (Reaction low), at 0.8384/70 (Break-up/Daily envelope), at 0.8334 (Reaction low + MTMA), at 0.8252/42 (38 % Retracement/ Uptrend line), and at 0.8215 (Break-up).

Resistance is seen at 0.8483(Reaction high Hourly), at 0.8500 (daily envelope + Reaction high), at 0.8528 (Break-down), at 0.8568 (Week high).

The pair is in neutral territory

News

US: Labour market deterioates quickly

In the week ended November 15, initial claims rose 27 000 from a downwardly revised 515 000 to 542 000, while the consensus was looking for a slight drop (505 000). Continuing claims, reported with a one-week lag, rose 109 000 from 3 903 000 to 4 012 000, which is significantly above the consensus estimate of 3 900 000 and is the highest level since December 1982. While the data might be distorted due to Veteran's day and seasonal adjustment problems, these figures suggest that conditions in the labour market are deteriorating sharply and quickly and no improvement is expected in the coming weeks. Current levels point to monthly payrolls contraction of + 300 000.

The leading indicators plunged 0.8% M/M in October and the previous figure was downwardly revised from 0.3% M/M to 0.1% M/M. The details show a sharp drop in stock prices (-0.89% M/M), building permits (-0.35% M/M), consumer expectations (- 0.29% M/M) and pace of deliveries (-0.22% M/M); whereas M2 money supply (0.71% M/M) and the interest rate spread (0.29% M/M) noted considerable increases. The Conference Board added that the economy is unlikely to improve soon and economic activity may contract further in the near term.

The Philly Fed dropped from -37.5 in October to -39.3 in November, while the consensus was seeking for a slight improvement (-35.0). New orders (-31.4 from -30.5), unfilled orders (-29.1 from -27.5) and average employee workweek (-19.7 from -18.4) all worsened, while shipments were unchanged (at -18.8). Number of employees deteriorated sharply from -18.0 to -25.2. Both prices paid (-30.7 from 7.2) and prices received (-15.5 from 5.3) showed remarkable plunges. The latter nurtures underlying fears that the deflationary tendencies will accompany the deep recession.

Other: Strong UK retail sales figure, but weak details

In the UK, retail sales dropped 0.1% M/M in October, while the consensus was looking for a decline of 0.9% M/M. The previous figure was downwardly revised from - 0.4% M/M to -0.5% M/M. On a yearly basis, retail sales rose 1.9% M/M in October, after a downwardly revised 1.7% M/M. Looking at the details, food stores rose 1.0% M/M, while textile and clothing (-1.5% M/M), household goods (-3.4% M/M) and nonfood stores (-1.1% M/M) showed significant declines. Although the headline figure is better than expected, the details show a bleak picture as consumers are delaying their spending.

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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.