Friday, 23 July 2010

Sunrise Market Commentary

Sunrise Headlines
 US Equities gained more than 2% on Thursday after strong corporate earnings and upbeat economic
data in Europe. This morning, most Asian shares gain ahead of the European stress test results, while
Chinese stocks trade unchanged.

 ECB’s Trichet said in an interview with the FT that public spending cuts and tax increases should be
imposed immediately across the industrialised world as evidence of a healthy European recovery
mounts.

 European banks are expected to disclose holdings of government debt in stress test results to be re-
leased this evening, although sources said there was some last-minute haggling among German
banks over how much to reveal.

 The Federal Reserve may try to push borrowing costs even lower if the job market continues to lan-
guish, Fed Chairman Bernanke said yesterday, offering a hint of what might trigger additional monetary
easing.

 China’s registered urban jobless rate, the only official measure of unemployment, was 4.2% at the end
of June, unchanged from three months earlier, the labour ministry said this morning.

 Several of Spain’s 18 savings banks, including some of those which have been involved in recent
mergers, have failed to pass tests to see how strong they would be if economic circumstances were
more adverse, newspaper El Pais reported.

 Hungary’s prime minister defied foreign critics of his fiscal policies, saying Budapest no longer needs
help from the IMF and won’t seek to extend an emergency financing agreement it signed in 2008.

 Crude oil ($79.02) hovers near an 11-week high as crude prices jumped yesterday more than 3% as
tropical storm Bonnie was expected to move towards energy installations in the Gulf of Mexico.

 Today, the eco calendar contains the German IFO indicator and UK Q2 GDP figures. The European
Banking Supervisors will release stress test results.

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 128.53/49(S1, Reaction low/Boll
bottom), at 128.42 (S2 Reaction low
hourly), and at 128.18 (S3, Reaction
low) .
On the topside, resistance stands
at 128.95 (R1 Breakdown hourly), at
129.09 (R2, Boll Midline), at
129.43/54 (R3 Reaction highs) Boll
top), at 129.93 (R4 Reaction highs).
The contract is in neutral territory.
Friday, 23 July 2010
Sunrise Market Commentary
On Thursday, one would have expected traders and investors to keep Wednesday’s
testimony from Mr. Bernanke on the back of their mind when stepping into the mar-
ket. The message from the Fed president was not overly optimistic. The US economy
was on path for a moderate recovery and the outlook was said to be ‘unusually un-
certain’. Especially job growth was/is too slow to really kick start the US economy.
The Fed has still some ammunition to support the economy, but it is too early to play
this ‘last’ card already at this stage. So short-term, the US economy has to try to
stage some kind of self-sustainable growth, even as it is far from evident how it will
be able to do so. This story weighed on global markets on Wednesday evening and
European equities opened in negative territory yesterday morning. Risk averse inves-
tor behavior prevailed.
However, the price action on the European markets was quite remarkable. Several
EMU confidence data, including the PMI’s for the month of July, surprised on
the upside. This triggered a rebound of the euro and later even the European equity
markets turned north again. Indeed, for the first time in long, most economic data,
both in the euro zone and US, surprised on the upside of expectations. In the morn-
ing, the euro zone PMI’s surprised friends and foes as manufacturing PMI rose al-
most one point, while a decline by 0.5 was expected. Also services PMI showed an
unexpected increase. Thirty minutes later, the UK retail sales rose more than ex-
pected and also before noon euro zone industrial new orders showed unexpected
strength. In the afternoon, US existing home sales, the leading indicators, house
price index and European Commission’s consumer confidence all surprised on the
upside of expectations, adding to the positive sentiment on markets. The US jobless
claims however provided a mixed picture with a sharp drop in continuing claims, while
initial claims surprised on the upside, but markets ignored the outcome and focussed
on the positive data. European stocks showed already decent gains in the morning
session in Europe. Aside from the stronger than expected EMU data, there was again
a lot of market chatter on the outcome of the stress tests (financials were an outper-
former). To be honest, we are a bit reluctant to link the rebound of the European eq-
uity markets on this factor, especially as at the same time to there is/was still a lot of
uncertainty on all kinds of technical issues with respect to the stress tests (and even
with respect to the timing of the publication!). Whatever the reason, European inves-
tors turned ‘remarkably’ risk-friendly. This move was extended during the US trading
hours, supported by strong results from the likes of Caterpillar, UPS and 3M. So,
most US equity indices preserved 2% gains. This is of course a constructive devel-
opment, but the S&P didn’t manage to take out the first important resistance area at
1099.
In his appearance before the House of Representatives Financial Services Commit-
tee, Bernanke repeated that he didn’t expect the economy to stall and that he there-
fore didn’t see any extra policy measures being needed. However, in case the econ-
omy does not continue to improve and if the Fed doesn’t see the kind of improve-
ments in the labour market that they are hoping for, the Fed is ready to act. The im-
pact of Bernanke’s second appearance before congress on Markets was limited.
On the Bond markets, US Treasuries lost some ground. The curve steepened in a
bearish fashion. Yields at the short end hardly moved, but yields for longer maturities
were 5/6 basis points higher. The European yield curve steepened, too. Yields at the
short end were even slightly lower. The pressure at the short end of the European
yield curve continues to ease. Yields at the longer end of the curve were 2/3 basis
points higher. So, European bond markets outperformed the US yesterday. Recently
the opposite was often the case. Intra-EMU, the spread moves suggest that some
kind of new equilibrium has been found. The underlying sentiment remains construc-
tive.
On the currency market, EUR/USD was in the defensive yesterday morning as risk
aversion prevailed after Bernanke’s statement on Wednesday evening. However, the
dollar rebound/euro decline was very short-lived. The better than expected European
data and the rebound on the equity markets propelled EUR/USD from levels around
1.2750 at the start of European trading to 1.29+ levels after the open of the US equity
markets. This move was mostly euro strength and a risk trade. However, the dollar
remained in the defensive, too. This was not only visible in the decline of the trade-
2

Technicals EUR/USD
Support comes in at 1.2839
(Reaction low), at 1.2787/82
(MTMA/daily envelope) at
1.2732 (Reaction low)..
Resistance stands at 1.2933/51
(Reaction high/breakdown
hourly +daily envelope), at
1.3029 (Reaction high), at
1.3075 (62% retracement) and
at 1.3095 (Boll top +reaction
high).
The pair is in neutral territory.
Friday, 23 July 2010
weighted dollar. Given the strong Sunrise Market Commentary
gains on the equity markets, the gains of the dollar against the yen were again mea-
ger. Bernanke keeping the door open for further monetary easing keeps traders and
investors doubting on the attractiveness of the US currency. No big story to tell on
EUR/GBP trading. The cross rate to some extent joined the global euro rebound. The
June UK retail sales came out strong, but uncertainty on the BoE policy going forward
might prevent sterling to profit from good news at this stage.
Today, the US eco calendar is empty, but in Europe, the German IFO and first es-
timate of UK Q2 GDP are scheduled for release. After an unexpected improvement
in June, the German IFO business climate indicator is forecasted to fall back again in
July. The consensus is looking for a drop from 101.8 to 101.5, but we believe the
risks are on the upside of expectations after the significantly better than expected
PMI’s yesterday. In the UK, GDP is forecasted to have expanded for the third con-
secutive quarter and growth is expected to have picked up pace. An expansion by
0.6% Q/Q is expected, twice the pace of the previous quarter. We have no reasons to
distance ourselves from the consensus, but a weaker figure might cause some dis-
appointment.
Last but not least, investors will keep a very close eye on the outcome of the Euro-
pean stress tests. The number of banks that have succeeded (or not) is probably not
the most important issue. Analysts will keep an very close eye on the technical
framework and the assumptions of the test. From example, the details on sovereign
debt exposure will be closely monitored. However, we have the impression that ‘a
reasonably good outcome’ of this stress test exercise is already more or less dis-
counted in the markets at this stage.
Regarding trading, the Bund yesterday reversed a strong open, mirroring the strong
European data and the rebound on the equity markets. However, in a medium term
perspective, the contract still perfectly holds the sideways consolidation pattern that is
already in place since end June. We hold on to our view that it won’t be easy for the
Bund to break north of the 129.93 resistance (contract high) in a sustainable way.
Uncertainty on the details of the stress test might still be a factor of investor’s caution
today. This could be a (slightly) supportive factor for the Bund going into the publica-
tion of the tests.
On the currency market, the euro had a strong run yesterday and reversed
Wednesday’s losses. In a longer-term perspective, trading in the major currency
cross rates is still driven by several, often conflicting, trading paradigms. Sentiment
toward the euro has obviously improved. Nevertheless, after the rebound since early
June, we have the impression that already quite some euro negativism should have
been priced out. So, we stay more cautious on the prospect for further ‘big’ euro
gains from the current levels. The Fed finally taking additional steps of monetary eas-
ing remains a risk to this scenario. Nevertheless, for now we hold on to our call that
sustained trading beyond the 1.3029/1.3095 resistance won’t be that easy. In a day-
to day perspective we expect some investor caution on the euro going into the publi-
cation of the stress tests. Or will the IFO be able to spark a similar surprise (and reac-
tion) as was the case yesterday? After last month’s strong report, this won’t be than
easy.
Recently, EUR/GBP had also entered some kind of consolidation pattern after the re-
bound since early of this month. Yesterday, sterling profited only temporary from the
stronger than UK retail sales. Today, the first estimate of the UK Q2 GDP growth will
be published. The report is interesting, but the release will provide very few details. A
deviation from consensus might be of some intra-day significance for sterling trading.
However, we expected EUR/GBP to hold the current consolidation pattern as long as
uncertainty on the BoE policy persists. As investors might stay a bit more cautious on
the euro overall today, this might help sterling to take some advantage from a strong
GDP figure.
USD/JPY continues to struggle, even in a context of decent investor risk appetite.
The pair fails to really move away from the year lows. JPY policy makers recently
stepped up their warnings on excessive yen strength, but at least for now, the impact
on USD/JPY trading is limited. The 84.82 level (2009 low) is still the line in the sand
for this cross rate. We need further evidence that the pair is becoming again more
sensitive to an improvement in global investors sentiment (if this sentiment would
continue!) before we reconsider to build up USD/JPY longs.
3
 Friday, 23 July 2010

Sunrise Market Commentary

US T-Note future: slight correction, but trend intact Bund: perfectly holding within sideways consolidation pattern

EUR/USD: supported by strong European eco data, but no (re-)

S&P (500): nearing first important resistance test of the 1.3000/95 resistance area yet.

USD/JPY: disappointing performance even as risk returns EUR/GBP: consolidation pattern extended

4
 Friday, 23 July 2010

Sunrise Market Commentary

Calendar
Friday, 23 July Consensus Previous
Canada
13:00 Consumer Price Index MoM YoY (JUN) 0.1% / 1.0% 0.3% / 1.4%
13:00 Bank Canada CPI Core MoM YoY (JUN) 0.1% / 1.9% 0.3% / 1.8%
UK
10:30 GDP (QoQ) (YoY) (2Q A) 0.6% / 1.1% 0.3% / -0.2%
10:30 BBA Loans for House Purchase (JUN) 37000 36709
Germany
10:00 IFO - Business Climate (JUL) 101.5 101.8
10:00 IFO - Current Assessment (JUL) 101.8 101.1
10:00 IFO - Expectations (JUL) 101.6 102.4
France
08:45 Consumer Spending (MoM) (YoY) (JUN) 0.3% / 0.5% 0.7% / 1.9%
08:45 Business Survey Overall Demand (JUL) -- 8
Italy
09:30 Consumer Confidence Ind. sa (JUL) 104.0 104.4
10:00 Retail Sales (MoM) (YoY) (MAY) 0.2% / 0.1% -0.3%/-0.5%
Belgium
15:00 Business Confidence Level. sa (JUL) -8.0 -7.7
Events
Schlumberger (12:00) Ford Motor (13:00) announce Q2 earnings
09:15 ECB's Gonzalez-Paramo Speaks in San Sebastian
12:00 ECB's Tumpel-Gugerell Speaks in London
18:00 European Banking Supervisors Release Stress Test Results

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

US 2,93 0,06 US 0,56 0,00 DOW 10322,07 201,62
DE 2,66 0,06 DE 0,69 -0,02 NASDAQ 0,00 0,00
BE 3,35 0,07 BE 1,03 0,00 NIKKEI 9406,11 185,23
UK 3,32 0,01 UK 0,72 0,00 DAX 6142,15 151,77
JP 1,07 0,01 JP 0,16 0,01 DJ euro-50 2714,21 74,69

IRS EUR USD (3M) GBP Eonia 0,52 0,00

3y 1,570 1,117 1,730 Euribor-1 0,63 0,00 Libor-1 0,571 0,00
5y 2,085 1,839 2,398 Euribor-3 0,88 0,00 Libor-3 0,738 0,00
10y 2,915 2,910 3,373 Euribor-6 1,13 0,00 Libor-6 1,023 0,00

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

EUR/USD 1,287 0,0101 EUR/JPY 111,82 1,38 266,86 1194,8 77,53
USD/JPY 86,89 0,39 EUR/GBP 0,8429 0,0009 - 1d 5,33 12,25 2,43
GBP/USD 1,5266 0,0104 EUR/CHF 1,3437 0,0037
AUD/USD 0,8908 0,0136 EUR/SEK 9,4025 -0,05
USD/CAD 1,0402 -0,0083 EUR/NOK 7,9575 -0,05

Brussels Research (KBC) Global Sales Force

Piet Lammens +32 2 417 59 41
Peter Wuyts +32 2 417 32 35 Brussels
Didier Hanesse +32 2 417 59 43 Corporate Desk +32 2 417 45 82
Joke Mertens +32 2 417 30 59 Commercial Desk +32 2 417 53 23
Institutional Desk +32 2 417 46 25
Dublin Research (KBC Bank Ireland)
Austin Hughes +353 1 6646892 London +44 207 256 4848
Prague Research (CSOB) Frankfurt +49 69 756 19372
Jan Cermak +420 2 6135 3578 Paris +33 153 89 83 15
Zdenek Safka +420 2 6135 3570 New York +1 212 541 06 97
Jan Bures +420 2 6135 3574 Singapore +65 533 34 10
Bratislava Research (CSOB)
Marek Gabris +421 2 5966 8809 Prague +420 2 6135 3535
Bratislava +421 2 5966 8436
Warsaw Research (Kredytbank) Budapest +36 1 328 99 63
Piotr Radzewicz +48 22 6345 946 Warsaw +48 22 634 5210
Budapest Research (K&H) Moscow +7 495 228 69 61
Gyorgy Barcza +36 1 328 99 89
Our reports are also available on: www.kbcdealingroom.com
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.
5