Sunrise Market Commentary

Global bonds held their composure as equities cannot take out cycle highs
Interesting but indecisive price action on Friday. Bonds were under pressure in the run-up to and immediately following the strong US retail sales, but losses were recouped as equities couldn't take out cycle highs. Attractive week ahead with the FOMC meeting and Greek drama as potential key drivers.
Major currency cross rates still in wait-and-see mode
Friday, major currency cross rates failed to develop a strong directional move as the retail sales were not able to extend the risk trade. This week, the focus is on the Fed meeting. Will the Fed support the case for a further cyclical rebound of the dollar?

The Sunrise Headlines

US Equities closed unchanged on Friday as a drop in US consumer confidence overshadowed strong retail sales data. This morning, Asian shares reversed their early gains.
Finance Ministers from eurozone countries hope to agree today on a way of providing heavily indebted Greece with financial aid, despite French and German doubts that a deal will be reached.
An acceptance by all Britain's main political parties of the need to repair the public finances means the country's triple-A rating is safe for now, according to Moody's senior vice president Kristin Lindow.
China's economy is likely to expand more than 9% this year, thanks to progrowth policies and an improving global environment, a government researcher said this morning.
The annual growth in asking prices for residential property in England and Wales slowed in March for the first time in a year after a glut of houses came on to the market, property website Rightmove said.
Crude oil prices ($80.76) dropped on Friday ahead of the first OPEC meeting in three months time.
Today, the eco calendar contains the US industrial production data, NY Fed survey and euro zone employment data.

Currencies: Major Currency Cross Rates Still In Wait-And-See Mode

EUR/USD

On Friday, the EUR/USD currency pair was well bid, especially during the morning session in Europe. Risk taking supported European equity markets and the euro. This move was reinforced by (much) stronger than expected European production data for the month of January. So, EUR/USD reached an intraday high just a few ticks below the 1.3800 mark after the publication of these data. However, the bid faded going into the US trading hours. The US retail sales came out stronger than expected, but the release was not really able to inspire a new directional move in equities or in EUR/USD. Stocks tried to move higher immediately after the release, but there was no follow-through price action. This hesitation in the risk trade capped also the upside in EUR/USD. The weaker than expected Michigan consumer confidence release prevented further gains both in stocks and in EUR/USD. So, the S&P continued to hover around the key 1150 resistance and EUR/USD settled in the mid 1.37 area to close the session at 1.3769, still a decent gain compared to the 1.3681 close on Thursday.

This morning, Asian stocks are ceding some ground, with China underperforming. This investor caution also caused the euro to return again a few ticks. At the start of this week, the markets are still focused on souvereign credit risk. Moody's published a report on the AAA souvereign debt issuers. Debt affordability is said to remain well positioned for the ratings of all AAA governments, but their distance-to-downgrade has been reduced. As such, this report doesn't contain clear point for the currency markets. The US and the UK are involved, just as is the case for the likes of Germany, France and of course, Spain. Nevertheless, markets focusing on the sovereign debt issue most often is no support for the single currency.

Today, the calendar in the US contains the Empire manufacturing survey, the TIC data and the industrial production data for February. In Europe, only some second tier data are on the agenda. However, as was seen on Friday, several markets are at key levels and even high profile data are no guarantee to unlock the current stalemate. One might expected that this will be even more difficult going into tomorrow's Fed meeting. The key question is whether the Fed will change the wordings of its policy assessment. More in particular, will the Fed already change the 'extended period of time' commitment in tomorrow's communiqué? If so, it might change the overall monetary picture. From a currency point of view, the Fed making small steps toward the exit of its ultra-loose monetary policy should be considered as USD supportive. Of course, next to those cyclical issues, the debate whether or not Europe will publish a detailed plan to support Greece continues. Recently, such a detailed plan had already been announced/expected several times, but nothing happened. So, investors will keep a wait-and-see approach until the plain is published and officially approved by all parties involved. Even in such a scenario, the outcome/details of the plan will not be by definition euro supportive. So, taking all this together, we expect that it won't be that easy for the euro to extend last week's gains at the start of this new trading week.

Global context. For most of 2009, the improvement in global risk appetite, together with exceptionally low US interest rates, were good reasons for investors to hold back on safe haven dollar long positions. However, at the end of last year, there was growing evidence that the US economy was gaining traction. This fuelled market speculation that US interest rates might be raised at some point and triggered a USD short-covering move. From that point, we were looking for clues that the US economy was/is improving at a pace strong enough for the Fed to scale down policy stimulation in a not-that-distant future. So, we installed a cyclically inspired sell-onupticks approach in EUR/USD. Since mid January, the Greek saga (and other intra- EMU tensions) became the most influential factor for EUR/USD trading, rather than the global cyclical picture and its policy implications. EUR/USD breaking below the 1.4220 support was a strong technical signal, even as it was due to outright euro weakness. US data series very cautiously continue to go in our way of a cyclical USD rebound. Nevertheless, market uncertainty on European government finances and its impact on global investor risk appetite remained the key driver for currency trading. The EU support for Greece (without any details) to some extent eased the tensions on higher-yielding EMU government bonds, but uncertainty still prevails. The Greek issue highlighted also the weak points of the EMU framework. This continues to weigh on the euro. The Fed discount rate hike mid February, even as it is in the first place a technical step on the way to normalization of the money markets, still might be seen as supportive to our cyclical USD rebound. So, we continue to feel comfortable with our long term EUR/USD negative bias. Tomorrow's Fed policy meeting will be the next point of reference for the case of a cyclical USD rebound.

In a short-term perspective, EUR/USD has entered a sideways consolidation pattern. Quite a lot of bad news has apparently been priced in for the euro. To be honest, we don't expect the recent (moderately positive) developments on Greece to be the trigger for a sustained euro rebound. EUR/USD traders have reached a point where they are looking for a new trading theme. In such a context, we keep a close eye on the technical charts. For now, we hold on to our view that a sustained EUR/USD rebound beyond the 1.3850 resistance area won't be easy (cf infra), but keep an open mind the see how a potential new trading theme (if it would be found) will affect trading.

Technical picture. Since December EUR/USD faced quite a forceful correction on the longstanding rally from March. The pair lost several important support levels, including the longstanding uptrend line, indicating that the EUR/USD bull-run has run its course and that EUR/USD trading entered a new era. The trend in this pair is obvious and any more pronounced rebound is still seen an opportunity to sell the single currency. For now, the 1.3850 area (previous high) is the first barrier on the topside. Recent price action reinforced our feeling that a (swift) return to/beyond this barrier won't be easy. 1.3405 (62% retracement) is the first target on the EUR/USD charts. LT the 1.2886 April low might gradually come into the picture. Over the past weeks, EUR/USD tested three times the 1.3460/33 support area, but a break didn't occur (1.3433 = new low). This is an indication that the downside in this pair was a bit exhausted. The pair regaining the MT downtrend line since December even might be seen as ST positive for this pair. Nevertheless, for now, we don't feel any need to change our standing EUR/USD negative bias. This remains a sell-on-upticks market. Nevertheless, short-term some more sideways price action in the 1.3443/1.3850 trading range might continue.

EUR/USD: regains the uptrend line since December

Support comes in at 1.3726/21 (Daily envelope/Break-up hourly), at 1.3689/68 (STMA/Broken Channel top), at 1.3640/26 (MTMA/weekly envelope + reaction low), at 1.3537/30 (Reaction lows), at 1.3477 (Daily Boll bottom), at 1.3433 (Year low) and at 1.3405 (62% retracement since 2008).

Resistance stands at 1.3770/78 (Boll top/Reaction high), at 1.3796 (Reaction high), at 1.3837/40 (Daily + Monthly envelope + 23% retracement LT/Reaction high), at 1.3849 (1st target off 1.3693) and at 1.3915 (weekly envelope).

The pair is in neutral territory.

EURGBP

On Friday, EUR/GBP trading was guided by global factors and by technical considerations as there were no eco data on the calendar. Global appetite for risk supported the UK currency early in European trading, as the EUR/GBP cross rate declined off from intraday highs in the 0.9110 area. BoE's Dale kept the door open for further QE, but his remarks had no impact on EUR/GBP trading. Later in the session, the correction in EUR/USD dragged also EUR/GBP lower. The pair closed the session at 0.9053, compared to 0.9082 on Thursday evening.

This morning, the UK Rightmove house prices came out soft at 0.1% M/M (5.3 Y/Y). Moody's in a report sounded rather 'optimistic' on the sustainability of the UK AAA rating. This is a moderately positive factor for sterling this morning. Later today, the UK calendar is empty.

Global context: During the August/mid October period, sterling showed additional losses as the BoE increased the amount of asset purchases. This policy was maintained going into the end of the year, but the UK currency entered calmer waters. Recently, there were some very cautious signs that the UK economy is leaving recessionary territory, too. From a monetary policy point of view, the question is whether the UK economy has already reached the point where sterling could become a cyclical play. Early February, the BoE shifted as expected, to a sit-and-wait approach. However, its assessment on growth and inflation remains soft and this view was confirmed in the February inflation report. So, we don't have any indication that the BoE will be a front-runner in scaling back policy stimulation when compared to the Fed or the ECB. This was the main reason why we didn't see a case for a sustained rebound of sterling. Of course, the euro was haunted by the EMU budget woes and the tensions on the intra-EMU government bond markets. This issue continued to weigh on the EUR/GBP pair, too. Nevertheless, we held/hold on to our assessment that EUR/GBP should be far less sensitive to this issue compared to EUR/USD.

In January, the picture for EUR/GBP was negative as the pair dropped below the medium term support area (0.8834). At the end of January, the slide in EUR/GBP eased and the pair even staged a rebound. Two tests of the 0.8834 neckline were rejected, but finally the break succeeded. The ongoing BoE talk on the possibility of more QE 'convinced' markets that any interest support for sterling is still very far away. Other issues (risk for a hung Parliament) only deteriorated the fate of sterling. The rebreak of the 0.8834/41 area materially improved the picture for EUR/GBP. After the test of the 0.9154 resistance, some consolidation kicked in. Nevertheless, we don't expect any sustained sterling rebound anytime soon. We maintain a buy-ondips approach. The 0.9150/54 is the first high profile mark on the charts. 0.9240 is the next medium term target.

EUR/GBP: consolidation pattern persists, but highs still within striking distance

Support comes in at 0.9047/42(Reaction low/Weekly envelope), at 0.9037/29 (MTMA/Break-up hourly), at 0.8996 (Reaction lows) and at 0.8982 (Reaction low).

Resistance is at 0.9077 (Broken STMA), at 0.9092 (Daily envelope), at 0.9111/20 (Reaction high), at 0.9150/54 (Reaction high/30 Nov high) and at 0.9240 (26 Oct high).

The pair is in overbought territory.

News

US: Core Retail sales surge, as the consumer kicks back

February retail sales surprised friend and foe as they rose by 0.3% M/M instead of the expected 0.2% M/M drop. Still better, core sales that exclude cars and gasoline surged 0.9% M/M following a 0.5% M/M increase in January. So, while the harsh weather conditions might have been a negative, it wasn't enough to keep consumers out of the shops. It seems that the recovery is broadening and Q1 2010 might turn out stronger than generally expected.

Consumer sentiment deteriorated in early March, according to a preliminary Michigan consumer sentiment survey, after sentiment already deteriorated in February. The headline index fell 1.1 points to 72.5, defying expectations for a small improvement. Taken together with the retail sales, it shows that a downbeat mood hasn't too much of an effect on consumer spending.

Business inventories were flat in January, while sales gained 0.6% M/M. This pushed the inventory-to-sales ratio down to 1.25 months, the lowest since March 2006. This suggests that the inventory cycle is nearing the end and might be followed by some re-stocking. So, inventories may add to Q1 GDP, but less so than in Q4 2009, when large part of growth came from the slowing of inventory drawback.

EMU: Industrial production surges, easing fears of double dip

Industrial production surprised sharply on the upside. Indeed, in January, output surged 1.7% M/M, while the December figure, initially reported at a disappointing - 1.7% M/M was revised higher to a stunning 0.6% M/M increase. On a yearly basis, production is up 1.4%, the first positive year-on-year reading. The report is promising for Q1 of 2010 and now it seems that the hard data are catching up with the more upbeat survey results

Download entire Sunrise Market Commentary

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.