Monday, 26 July 2010

Sunrise Market Commentary

Sunrise Headlines
 US Equities advanced on Friday as the European bank stress tests showed that 84 of 91 lenders had
passed the examination, easing concerns about the health of the region’s financial system. This morn-
ing, most Asian shares start the week in positive territory.

 On Friday, EU regulators said that only seven of 91 of the region’s systematically important banks failed
the eagerly awaited stress test and would need to raise an additional €3.5 billion in capital, but some
market experts were left sceptical that the tests were rigorous enough to restore confidence.

 The US economy is not likely to slip back into recession but letting tax cuts for the wealthiest expire
is necessary to show commitment to cutting budget deficits, US Treasury Secretary Geithner said yes-
terday.

 European regulators have accused Germany and its banks of reneging on a deal to publish full
details of sovereign debt holdings as part of the stress test exercise. Six of the fourteen German
banks tested did not publish the expected detailed breakdown of sovereign debt holdings.

 The UK economy grew almost twice as mush as expected in the second quarter, the fastest expansion
for four years as rebounding services, manufacturing and construction ignited the recovery.

 Japan’s government can’t continue to rely on excessive bond issuance to fund fiscal spending, the fi-
nance minister waned this morning, as the ruling Democratic Party officials wrangle over spending for
the next fiscal year.

 ECB policymakers increased pressure on Friday on industrialised countries to cut public spending im-
mediately in order to consolidate the present recovery.

 BP is poised to announce the departure of Tony Hayward, its chief executive, in the next 24 hours, ac-
cording to people close to the company, the FT reports on its website.

 Japanese export rose more than expected in June from a year earlier but the pace of increase slowed
for the fourth straight month, a sign the economic recovery may lose steam.

 Two top ratings agencies warned on Friday they might downgrade Hungary’s sovereign debt after its
prime minister snubbed the IMF and rejected austerity measures in favour of a pro-growth policy.

 Today, the eco calendar contains the US new home sales. Belgium and Germany will tap the market.
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
finally a correction is taking place.
Main support area at 127.60-12 may
come under test, but a drop below
last week’s low (128.18) would be a
concern. We don’t expect it too hap-
pen.
On the downside, support comes in
at 127.85 (S1 last week low), at
127.63 (S2, break up daily), at
127.60/12 (S3 prev. high/ 21 June
low),
On the topside, resistance stands
at. 128.54/57 (R1, reaction high
hourly/STMA), at 128.79/82
(LTMA/MTMA), at 128.91 (R3, reac-
tion high hourly) and at 129.08 (R4,
weekly envelop).
The contract is in near oversold
territory.
Monday, 26 July 2010
Sunrise Market Commentary
On Friday, the economic data in Europe continued to surprise on the upside of ex-
pectations. The German IFO indicator rose to its highest level in three years, confirm-
ing the improvement in the euro PMI’s. In the UK, GDP rose almost twice as fast as
expected, due to a sharp pick-up in construction, but also the services and manufac-
turing sector enjoyed fast growth in the second quarter. GDP rose by 1.1% Q/Q,
while a growth rate of 0.6% Q/Q was expected. The US eco calendar was empty.
On the markets, the strong European economic data didn’t go unnoticed, while
investors were also waiting for the results of the stress tests that were pub-
lished after the closure of European markets. This resulted in a further correc-
tion of global bonds, modestly higher equities, while commodities showed no
firm direction. In the FX markets, the euro was little changed against the US
dollar, but the dollar gained on the yen.
Intra-day, US Treasuries showed a very brief reaction on the release of the stress
tests, but as equities ignored the results, US Treasuries rebounded to levels from be-
fore the release, only to drop later in the session when equities rebounded. The
global bond markets were on the defensive on the back of excellent German IFO and
UK GDP releases, which resulted in a down-move on the release itself. It was the
second day in a row that global bonds corrected lower. While the stress tests were
not published yet, we think that markets continued to look at them positively, which
meant that risk aversion waned further. This was also reflected in the intra-EMU bond
market, where spreads versus Germany across the board narrowed. Looking at a
weekly perspective, the narrowing of the spreads versus Germany was especially an
issue for Italian and Spanish bonds, much less for Portuguese, Greek or Irish
spreads.
The European Bank stress tests delivered some surprising results. Indeed, only 7
banks, five Spanish saving banks, German Hypo Real Estate and the Greek Agricul-
ture Bank failed and the global shortfall of capital is only €3.5B. In the US, the stress
tests revealed that 11 of the 20 tested banks needed a combined €74.6B in fresh
capital as a buffer for an adverse development of the banking environment. Some in-
vestment banks had done tests that revealed capital shortages of €38 to 85B. So, a
number of analysts were quickly to dismiss the European stress tests as not severe
enough. The critique understandably focussed on the absence of a default probability
of sovereign debt in the banking books. The tests did take account of haircuts in the
trading books, but about 90% of sovereign debt sits in the banking books and not the
trading books. However, dismissing these tests on that argument would be un-
fair. The Bank Stress Tests were certainly tough enough with regard to all bank
exposure (corporate, consumer, real estate) except the sovereign risk in the bank
books, admittedly a big issue in bank balance sheets. The adverse scenario tales into
account a double dip recession with negative growth figures both for 2010 and 2011
and declines in commercial and residential property prices, all adapted to the individ-
ual situation of the various countries. The stress tests also applied a tough inter-
est rate shock that was more severe that the rise in rates in May. Short interest
rates were upped 125 basis points to take account of a liquidity crisis and e.g. Span-
ish 5-year government yield was put at 5.78% in 2011, while the Greek one was
13.87%. This is a very severe shock that was applied to all bank exposure (except
the sovereign risk in the banking books). The exercise resulted in a global loss of
€566B over 2010-2011, or about €237B more than in the benchmark scenario, but
except for the seven banks that failed the test, other banks have enough capital to
face these losses. However, the main positive of the whole stress test may be
the transparency and consistency. Everybody may now do its own exercise, also
because the details of the sovereign debt exposure of individual banks are known
(except for a small number of German banks that will come under suspicion of the
market). This softens the criticism that the stress tests didn’t take sovereign de-
fault risk on the banking books into consideration. However, while one might
eventually fear a default of the Greek government under some circumstances and
eventually also some other smaller governments (as a catastrophic scenario), it
would show that the overwhelming majority of banks could weather the storm.
This means that the market may now start to discriminate between banks.
Some banks that have passed the post may still be considered as risky and thus con-
tinue to have difficulties to get access to (money market) funding. However, the more
general suspicion between banks may wane and thus there might be a normalisation
2
 Monday, 26 July 2010

of the money market workings. If Sunrise Market Commentary

this would be the case, the stress tests would have fulfilled their objective and
a big obstacle to normalcy would have been taken away. However, the stress
tests concerned the capital situation of banks. The longer term funding of banks
remains a big issue for which the stress tests didn’t bring a solution. Banks will
need to compete with governments that have still a big appetite for money to
fund their deficits and refund their enormous debt pile. This might still restrain
bank lending and cause banks to deleverage further. Overall, we think however that
banking risk has diminished greatly after the stress tests. The ECB is still active on li-
quidity for months to come and in case of problems can still go further in providing li-
quidity. The Securities Market Program and the Covered Bond Program of the ECB,
while on a low pace or stopped, are still available and a government backstop, the
European Financial Stability Facility, is now operational. Concluding, one can always
look for more negative scenarios, like most governments default, but these aren’t re-
alistic and the risk test scenario looks a “realistic” risk scenario that most banks can
cope with.
We will closely see how the Euribors and the liquidity premium on the money
markets react, as well as European equities, the euro, the government bond
yield spreads. Overall, we don’t expect any steep reactions in the various mar-
kets that have already anticipated a positive outcome. However, longer term it
remains a positive that should underpin risky assets at the (small) price of core
bonds.
Today, the eco calendar is thin as it only contains the US new home sales. On the
supply front, Belgium (OLO March 2016 and Sep 2020 for €2-2.8B) and Germany
(€4B Bubills) will tap the market. Belgium cheapened recently versus peers which
might attract investors. Most investors will chew and react on the publication of the
stress tests. Later this week, the EMU and US eco calendars are not too important
expect for the M3 and EU confidence indications in EMU and the GDP and Chicago
PMI in the US. More attention will go to supply in both EMU and US, albeit it in holi-
day-thinned markets.
After a dramatic drop of almost 33%, US new home sales are forecasted to show a
slight rebound in June. The consensus is looking for a 6.7% M/M increase, but we
believe a weaker outcome is not excluded. Later this week, the euro zone M3 money
supply and credit growth data, euro zone CPI and the US Q2 GDP data will receive
some attention. Last month, the euro zone lending data showed an increase in lend-
ing to non-financials, which might be a first indicator that lending to the private sector
might be starting to pick up. It will be interesting to see whether lending to non-
financials increases further in June, as it is an important factor for the recovery to
gain strength. In the US, growth is expected to have slowed somewhat further in the
second quarter (2.5% Q/Q from 2.7% Q/Q). We have no reasons to distance our-
selves from the consensus, but a weaker outcome won’t go unnoticed as will raise
fears for a double dip, especially in the US as UK GDP came out surprisingly strong
last Friday.

Regarding bond market trading today, as expected the Bund correction continued
at the European open (or at least the after-official trading dip on Friday was con-
firmed). We have long advocated that the Bund had slid in a sideways trading range
between 129.93 and 127.60/12, but the Bund remained stuck near the top side of the
range. On Friday, the Bund showed signs that it might test now the downside of the
range and this might be the issue for this week. We stick to the view that dropping be-
low that range would be difficult, but if the market would enthusiastically react on the
stress tests (not our main expectation, see above) a sustained drop below would be a
warning signal that a more pronounced correction is in store. Given the months long
safe haven status of the Bund, such a deeper correction cannot be excluded though.
For the US Treasuries, the situation is bit different. The Sep Note future is still in an
uptrend (uptrendline is tested now) and key support is still further away, notably at
121-20+. For the US, one should take into account that the eco data have shown
signs of weakness.

3

Technicals EUR/USD
Support comes in at 1.2878
/72(Reaction low/STMA), at
1.2811 (MTMA), at 1.2803/97
(daily envelope/Weekly enve-
lope) at 1.2732 (Reaction low)..
Resistance stands at 1.2966/76
(Reaction high/daily envelope),
at 1.3029 (Reaction high), at
1.3095 (Reaction high) and at
1.3124 (Boll top).
The pair is in neutral territory.
Monday, 26 July 2010
Sunrise Market Commentary
On Friday, the market talk was on the outcome of the stress tests for the European
banking sector. As was already the case for quite some time, this was a debate be-
tween believers and non-believers. For the euro, one would expect this uncertainty to
be a (slightly) negative factor. The pair started the session in the 1.29 area. However,
after the very strong PMI’s on Thursday, markets also had to keep an eye on the
German IFO indicator. As was the case for the PMI’s, the IFO was again much
stronger than expected and just as was the case on Thursday, the UK data (Q2 GDP)
were also much stronger than expected. This pushed EUR/USD to an intraday high
at around 1.2965. However, the stress tests were too much of a factor of uncertainty.
The euro had to return the early gains soon and a defensive repositioning hammered
the single currency early in US trading with the pair testing bids just below the 1.2800
mark. The publication of the test results caused some temporary volatility with
EUR/USD moving up and down between 1.2800 and 1.2900. However, looking at the
(US) indicators of ‘stress’, investors at least came to the conclusion that the outcome
of the test didn’t contain any unexpected negative news. Equities turned north and
the VIX volatility indicator eased. Finally, EUR/USD closed the session at 1.2909,
very close to the 1.2893 close on Thursday.
We made an assessment on the outcome of the stress tests elsewhere in this report.
A lot of issues could have been addressed in a different way. However, for us, the
bottom line is that the outcome of the stress tests should be a (moderately) positive
factor for the European markets. So, while the immediate impact on the euro has
been limited until now, we would consider it as mildly positive. At least, it removes an
additional factor of uncertainty. From a market point of view, the question is now
whether this factor will be enough a reason for a new up-leg in the euro. In this re-
spect, we are still inclined to hold on to our view that the euro has already succeeded
a nice rebound, admittedly from distressed levels. Nevertheless, the easing tensions
on the intra-EMU government bond markets, the outcome of the stress tests and, last
but not least, the strong eco data as published at the end of last week are all euro
supportive factors. So, in a day-to-day perspective, we wouldn’t be surprised to see
EUR/USD go for a (re)test of the 1.3029/95 resistance area. We stay open-minded,
but don’t anticipate on a sustained break of this level yet. Today’s data (Chicago Fed
and Dallas Fed indicators and the New homes sales) will probably have no lasting ef-
fect on trading.
Sterling had quite a good run on Friday. EUR/GBP was changing hands just above
the 0.8400 mark at the start of trading in Europe. There was a brief up-tick after the
publication of the strong IFO release in Germany. However, half an hour later, the UK
Q2 GDP release came out much stronger than expected. EUR/GBP turned south.
This move was both sterling strength in the wake of the strong GDP figures but it was
also global euro weakness going into the publication of the results of the European
stress tests. The pair dropping below Wednesday’s/Thursday’s lows even acceler-
ated the move. The pair reached an intraday low at 0.8318 late in European trading.
The publication of the stress tests results finally gave the euro some downside cor-
rection and EUR/GBP joined this move. The pair closed the session at 0.8372, com-
pared to 0.8449 on Thursday.
Last Friday’s GDP data will make the debate at next week’s BoE meeting ever more
interesting. Recently, it looked that the ‘Sentence’s view’ was only an outlier within
the MPC and that the doves would maintain the lead. Even a further easing of policy
was not ruled out yet. However, after Friday’s strong GDP data, the case of the doves
hasn’t been strengthened. We expect the BoE to maintain a wait-and-see approach
for now. So, we still don’t bet on the ‘Sentance’ camp gaining much more ground. So,
in this context, we don’t see a reason for EUR/GBP to break out of its recent consoli-
dation pattern anytime soon.
On Friday, there was again no big story to tell on USD/JPY trading. The pair moved
gradually higher throughout the session. Trading was mostly driven by technical
considerations. The dollar profited overall from some investor caution on the euro
going into the publication of the stress tests. At the same time global sentiment on
risk as mirrored in the equity markets’ performance wasn’t that bad. So, the pair fi-
nally managed to create somewhat of a buffer from the recent lows and closed the
session at 87.46 from 86.95 on Thursday evening.
This morning, Asian equity markets are modestly higher. However, in line with the
price action of late USD/JPY fails to draw much support from this. The downside in
4
 Monday, 26 July 2010

this pair is a bit better protected Sunrise Market Commentary

now (probably also as the market fears BOJ action in case of a drop to the 85.00
area). However, the pair obviously needs very high profile positive news to make any
further progress. As we don’t see a trigger for such a news flow anytime soon, the re-
cent stalemate in this pair might still continue for a while.

US T-Note future: Correction, but trend intact Bund: test of the downside trading range in store?

Bund (intra-day): Eco data put Bund in defensive. Reaction on EUR/USD: no spectacular reaction to the stress tests, but re-
stress tests less clear moval of uncertainty might be moderately supportive

USD/JPY: cautious gains, but picture remains heavy. EUR/GBP: sterling gains on strong Q2 GDP release

5
 Monday, 26 July 2010

Sunrise Market Commentary

Calendar
Monday, 26 July Consensus Previous
US
14:30 Chicago Fed Nat Activity Index (JUN) -- 0.21
16:00 New Home Sales (JUN) 311K 300K
16:00 New Home Sales MoM (JUN) 3.7% -32.7%
16:30 Dallas Fed Manf. Activity (JUL) -2.5% -4.0%
Japan
01:50 Merchnds Trade Balance Total (JUN) A ¥687.0B ¥324.2B
01:50 Adjusted Merchnds Trade Bal. (JUN) A ¥456.0B ¥416.1B
01:50 Merchnds Trade Exports YoY (JUN) A 27.7 32.1
01:50 Merchnds Trade Imports YoY (JUN) A 26.1 33.4
UK
01:01 Hometrack Housing Survey (MoM) (YoY) (JUL) A-0.1%/2.0% 0.1% / 2.1%
Sweden
09:30 Trade Balance (Kronor) (JUN) 6.5B 2.7B
Events
18:00 Treasury's Brainard Delivers Address in Washington
Belgium Holds OLO Auction (2-2.8B 2.75% Mar2016 & 3.75% Sep2020)
Germany New Bubill Auction (4B Jul2011)

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

US 2,98 0,05 US 0,58 0,02 DOW 10424,17 102,10
DE 2,73 0,07 DE 0,75 0,06 NASDAQ 0,00 0,00
BE 3,38 0,02 BE 0,96 -0,07 NIKKEI 9503,66 97,55
UK 3,43 0,12 UK 0,83 0,11 DAX 6166,34 24,19
JP 1,07 0,00 JP 0,16 0,00 DJ euro-50 2719,13 4,92

IRS EUR USD (3M) GBP Eonia 0,50 -0,02

3y 1,653 1,188 1,825 Euribor-1 0,63 0,00 Libor-1 0,571 0,00
5y 2,162 1,923 2,485 Euribor-3 0,89 0,00 Libor-3 0,740 0,00
10y 2,971 2,975 3,435 Euribor-6 1,13 0,00 Libor-6 1,032 0,01

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

EUR/USD 1,2935 0,0063 EUR/JPY 113,11 1,29 266,62 1192,85 77,64
USD/JPY 87,48 0,59 EUR/GBP 0,8366 -0,0060 - 1d -0,24 -1,95 0,11
GBP/USD 1,5458 0,0192 EUR/CHF 1,3591 0,0150
AUD/USD 0,8964 0,0053 EUR/SEK 9,438 0,04
USD/CAD 1,0357 -0,0042 EUR/NOK 7,9657 0,01

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