Monday, 19 July 2010

Sunrise Market Commentary

Sunrise Headlines
• US Equities dropped sharply on Friday as a sharp decline in consumer confidence added to fears that
the recovery is losing steam. The Dow/S&P dropped by 2.52% / 2.88% led by financials. This morning,
most Asian shares drop, while Chinese stocks gain some ground.

• The IMF and EU suspended a review of Hungary’s funding programme, set up in 2008, saying it
must take tough action to meet targets for cutting its budget. The suspension of talks means Hungary
will not have access to remaining funds in its $25.1 billion loan package.

• Engineers monitoring BP’s damage well in the Gulf of Mexico detected seepage on the ocean floor that
could mean problems with the cap that has stopped oil from gushing into the water, the US govern-
ment’s top oil spill official said yesterday.

• Moody’s Investors Service downgraded this morning Ireland’s government bond ratings to Aa2 from
Aa1, but changed the outlook from negative to stable.

• The German government believes the economy may have grown by a stronger than expected rate of
above 1.5% in the second quarter, news magazine Der Spiegel said on Saturday.

• The International Monetary Fund is seeking commitments by as early as November to boost its lend-
ing resources to $1 000 billion from $750B to build safety nets that could prevent financial crises, the FT
reports on its website.

• The People’s Bank of China is confident of hitting the government’s 3% target for consumer inflation this
year, a central bank vice-governor said this morning.

• Slovakia would not agree to an extension of the European safety net to more than three years nor to
making it permanent, Finance Minister Miklos said in an interview.

• Dutch electronics group Philips hiked its 2010 margin target on Monday after emerging market growth
drove higher-than-expected sales and profit growth despite fears that the recovery was losing steam.

• Today, the eco calendar is thin is it only contains the US NAHB housing market index. Japanese mar-
kets are closed in observance of Marine Day Holiday.

1

Markets
Technicals Sep Bund future
The LT bullish technical picture of
the Bund remains intact, but a re-
test of the contract highs failed and
a modest profit taking correction
took place. Main support area is
127.60-12, but a drop below last
week’s low (128.18) would be a
concern.
On the downside, support comes
in at 128.87/69 (S1, Break-up/
daily envelope, at 128.37 (S2, Boll
Bottom). And at 128.186 (S3, Re-
action low),
On the topside, resistance stands
at 129.47/57 (R1, Daily enve-
lope/MT reaction high), at break-
down hourly/MTMA) and at
129.80/93 (R2, Boll Top/ MT reac-
tion high hourly).
The contract is in neutral territory.
Monday, 19 July 2010
Sunrise Market Commentary
On Friday, the euro zone seasonally adjusted trade balance data showed a deficit for
the first time since February 2009 as imports (4.2% M/M) grew faster than exports
(0.9% M/M). More interesting for markets were however the US data. CPI inflation
was too close to expectations to have an impact. In June, CPI inflation dropped from
2.0% Y/Y to 1.1% Y/Y as a 0.7% M/M decline of last year fell out of the calculation,
but also energy prices dropped significantly (-2.9% M/M). Core CPI rose by 0.2%
M/M, with the annual figure unchanged at 0.9% Y/Y due to a broad array of indexes
that reported increases. More important for markets was the University of Michigan
consumer confidence indicator, which dropped sharply in July (66.5 from 76.0) as
consumers became more pessimistic about both the current conditions and outlook,
probably due to bleak prospects for incomes and jobs.
On global markets, investors still were in some kind of wait-and-see mode during
the morning session in Europe. European equities were slightly higher and there was
even some cautious narrowing of spreads in some parts of the intra-EMU govern-
ment bond market. On the other hand, investors continued to grow more concerned
on the US growth prospects. The much weaker than expected US consumer confi-
dence release was the tipping point for all markets on Friday afternoon. Already ear-
lier last week decent corporate earnings were mostly ignored by investors as they
were concerned on the economic outlook for the second half of the year. The Michi-
gan consumer confidence only reinforced that uncertainty. Stocks nosedived and risk
aversion was again the name of the game. US equity indices closed the session with
losses roughly between 2.5% and 3.1% with the Nasdaq underperforming. Financials
were hit hard, too. Core bonds spiked higher and the 10-year note future reached a
new high. US yields declined across the curve between 1.6 and 9.3 basis points, with
the belly of the curve outperforming. Yields were lower between 1.0 and 4.7 basis
points.
Uncertainty and risk aversion continue to be the dominant themes on global mar-
kets today. The steep the decline of the US consumer confidence is still the headline
story on all market screens. Despite some comforting comments from all kinds of
(European) officials, markets are still awaiting the results of the stress tests of the
European banks that will be published on Friday evening. Last but not least, on Sat-
urday, the Hungary ended premature talks with the IMF and the EU without a conclu-
sion of the countries programme review. Even as Hungary doesn’t need additional
money anytime soon, this will bring the theme of government finances in Europe (in-
side and outside the euro zone) again into the spotlights. Asian stocks are mostly in
negative territory. China is an exception to the rule.
Today, the eco calendar is thin as it only contains the US NAHB housing market in-
dex, which is expected to decline slightly (16 from 17) after a significant drop in June.
Later this week, we will receive a more complete view on the US housing market
with the housing starts & permits, existing home sales and house price index. Last
month, the May housing market data were awful as the end of the tax credit de-
pressed sales. Weakness is expected to continue in June, although the figure will
probably not be as bad as in May. In the euro zone, the focus will be on the July
PMI’s, which are forecasted to show a slight worsening in sentiment, both in the
manufacturing and services sector. Attention will also go to the UK, where the first
estimate of second quarter GDP is on the agenda on Friday. In the UK, growth is ex-
pected to have accelerated in the second quarter to 0.6% Q/Q (from 0.3% Q/Q in
Q1). Besides the eco data, Bernanke’s semi-annual monetary policy report and
the euro zone Bank’s stress tests are key this week.
Regarding trading, we expected core German bonds to be well supported at the
start of this new trading week. However, sustained trading beyond the 129.93 area
won’t be easy. The stalemate in the talks between Hungary and the IMF will probably
be no help for the peripheral European bond markets. With respect to the earnings, it
will be interest to see the market reaction to the results/forecasts of companies with a
highly cyclical business. Will good results from these kinds of firms still be able to
ease the pain?
2

Technicals EUR/USD
Support comes in at 1.2891
(Daily envelope), at 1.2847
(break-up hourly/STMA), at
1.2805 (Break-up hourly), at
1.2778/68 (Break-up
daily/Weekly envelope) and at
1.2694 (MTMA).
Resistance stands at 1.2955
(Reaction high), at 1.3008/10
(Reaction high/Boll top), at
1.3032/47 (Last target
H&S/daily envelope), at 1.3075
(62% retracement since March)
and at 1.3095 (10 May high).
The pair is in overbought terri-
tory.
Monday, 19 July 2010
On Friday, EUR/USD traders at Sunrise Market Commentary
first continued to trade the same story that drove the price action earlier last week.
So, even as there was no important news on Friday morning in Europe, the
EUR/USD rebound continued unabatedly. The pair even tested the 1.3000 mark
around noon. The situation changed gradually during the US trading hours. The US
CPI came out close to expectations. However, the fact that it didn’t bring additional
USD negative news was enough for the EUR/USD rally to slow. EUR/USD returned
below the 1.30 mark. Call it end of week profit taking. Later in the session, the Michi-
gan consumer confidence was also sharply lower than expected. Earlier last week,
this news had probably been seen as dollar negative. However, this time the dollar
didn’t lose any further ground against the euro anymore. The sell-off in global equities
even caused further profit taking on EUR/USD longs. EUR/USD closed the session at
1.2930, compared to 1.2950 on Thursday.
Today, the calendar is almost empty. However, tensions on Hungary are probably no
help for the single currency. Later this week, the US eco calendar remains relatively
thin with the focus mostly on housing data. However, Bernanke’s policy report before
Congress on Wednesday and on Tuesday could be important as it might given some
insight in the Fed thinking (e.g. on additional measures to support the economy)
Last month, the negative impact of the flaring up of tensions on Hungary was rather
short-lived. However, it is far from sure that this will again be the case today. Never-
theless, the recent developments illustrate that it will still be difficult for EUR/USD
traders to choose which trading theme to play. Will risk aversion and the (European)
sovereign debt crisis receive again more attention or will the risk of a slowdown in the
US (and the subsequent case for dollar weakens) prevail as was more or less the
case of late. A soft tone from the Fed president won’t help the dollar. This week most
attention will also continue to go the corporate earnings and the reaction of equities
these to the earnings. In this respect, it will be difficult for the euro to continue to
shine if equity markets continue to show only moderate gains (or even quite sharp
losses) in the wake of good results as was the case in the second half of last week.
The outcome of the stress tests for European banks will be we the wild-card for trad-
ing at the end of the week. In the mean time, there we be a lot of rumours on the out-
come of these stress tests. Uncertainty on this issue becomes a reason turn a bit
more cautious in the euro going into the publication of this report.
Last week, we indicated that the market focus had tilted toward dollar weakness. The
break above the 1.27 resistance area improved the short-term picture for EUR/USD
and opened the way for a retest of the 1.3095 area (early May reaction high after the
announcement of the EU rescue package). The pair reached a new high just north of
the 1.30 mark at the end of last week. Given the most recent developments (sharp
rise in risk aversion, uncertainty on Hungary), we assume that Friday’s high won’t be
easy to regain any time soon. The correction on Friday could be somewhat of a tip-
ping point, at least short-term. Has the EUR/USD rebound run its course? We will
closely monitor the price action, but we are inclined the start the new trading week
with a sell-on-upticks bias.
On Friday, cable decoupled from EUR/GBP. We didn’t see a specific reason. Techni-
cal considerations probably played a role. The topside in cable apparently was
blocked by resistance in the 1.5500/24 area. On the other hand, EUR/USD initially
simply steamed ahead. So, EUR/GBP went through the roof and the pair extensively
tested the 0.8443 breakdown area (intraday top at 0.8459). However, the correction
global correction of the euro after the USD data capped also the rally in EUR/GBP
even as the pair are lost any ground. EUR/GBP closed the session at 0.8450 com-
pared to 0.8375.
Overnight, the Rightmove house prices came out rather weak at -0.6% M/M and
3.7% Y/Y. In a weekend interview, BoE’s Sentance repeated its call for an early rate
hike, but his view is already well-known and the impact of these headlines in trading
is declining.
Today, the UK calendar is again empty. The ‘key’ question is whether EUR/GBP
will be able to break out of the recent consolidation pattern. In this respect we con-
tinue to monitor the 0.8428/43 break-down area. A first test on Friday was rejected.
This morning, the euro is weaker overall, but at least for now the losses in EUR/GBP
are limited. For now, we don’t anticipate on a break higher in EUR/GBP yet, even as
we can’t ignore that the recent positive sentiment toward sterling is waning, too.
3
 Monday, 19 July 2010

On Friday, global dollar weakness Sunrise Market Commentary

was also at work in the USD/JPY cross rate. However, EUR/JPY holding up tempo-
rary eased the downside pressure in the headline pair, too. USD/JPY hovered in a
tight range above the 87.00/86.96 support area, but fell through this level at the start
of US trading. Equities once again failed gain on US corporate results. This kept
USD/JPY under pressure. The pair seta new 2010 low and closed the session at
85.57, compared to 87.40 on Thursday.
This morning, USD/JPY is holding close to Friday’s lows, even as there are no addi-
tional yen gains against the dollar. Nevertheless, as long as the current pop-up of
risk aversion persists, there is no good reason to row against the tide. 84.82 (2009
low). is still the line in the sand for the this cross rate.

4
 Monday, 19 July 2010

Sunrise Market Commentary

S&P nosedives on poor US consumer confidence release US T-Note future: new high .

Bund: moving higher in the range . EUR/HUF: forint hammered as IMF/EU talks are suspended

EUR/USD: off from Friday’s highs, but no sharp losses yet USD/JPY: holding close to the recent lows

5
 Monday, 19 July 2010

Sunrise Market Commentary

Calendar
Monday, 19 July Consensus Previous
US
16:00 NAHB Housing Market Index (JUL) 16 17
Canada
14:30 Int'l Securities Transactions (MAY) 6.500B 12.360B
UK
01:01 Rightmove House Prices MoM YoY (JUL) A-0.6%/23.7% 0.3% / 5.0%
EMU
10:00 Current Account SA (MAY) -- -5.1B
11:00 Construction Output SA MoM YoY (MAY) -- -0.3%/-6.1%
Norway
10:00 Existing Homes QoQ (2Q) -- 3.4%
Events
Japanese Markets are closed in observance of Marine Day Holiday
Philips (07:00), Texas Instruments (22:30) announce Q2 earnings
15:00 Fed's Duke Gives Welcoming Remarks at CRA Hearing
Germany Bubill Auction (2.0B Apr2011)

10-year td - 1d 2 -year td - 1d STOCKS - 1d

US 2,93 -0,05 US 0,59 -0,01 DOW 10097,82 -261,56
DE 2,61 -0,03 DE 0,78 -0,01 NASDAQ 0,00 0,00
BE 3,26 -0,01 BE 1,01 -0,08 NIKKEI 9408,36 0,00
UK 3,33 -0,04 UK 0,74 -0,02 DAX 6040,27 -109,09
JP 1,10 0,00 JP 0,16 0,00 DJ euro-50 2645,61 -57,20

IRS EUR USD (3M) GBP Eonia 0,56 0,07

3y 1,615 1,190 1,750 Euribor-1 0,60 0,02 Libor-1 0,571 0,00
5y 2,075 1,882 2,403 Euribor-3 0,86 0,02 Libor-3 0,735 0,00
10y 2,855 2,923 3,343 Euribor-6 1,11 0,01 Libor-6 1,021 0,00

Currencies - 1d Currencies - 1d Commodities CRB GOLD BRENT

EUR/USD 1,2905 0,0011 EUR/JPY 111,81 -0,48 262,22 1192,55 75,24
USD/JPY 86,66 -0,44 EUR/GBP 0,8432 0,0065 - 1d -1,99 -14,70 -0,54
GBP/USD 1,53 -0,0106 EUR/CHF 1,3527 0,0068
AUD/USD 0,8685 -0,0065 EUR/SEK 9,5191 0,09
USD/CAD 1,0538 0,0118 EUR/NOK 8,1196 0,14

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