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US Equities dropped sharply lower on Friday on fresh worries about the debt crisis in Europe, which even intensified after the resignation of ECBs Stark. The S&P ended 2.67% lower. This morning, also Asian shares trade sharply lower. ECB Executive Board member Juergen Stark resigned unexpectedly on Friday in conflict with the central banks policy of buying government bonds to combat the euro zones debt crisis. The ECB confirmed that the chief economist would leave for personal reasons. After weeks of market turbulence, finance ministers and central bankers from the Group of Seven industrialised nations pledged a coordinated response to the global slowdown, but offered no specific steps and differed in emphasis on Europes debt crisis. Britains banks should shield their retail operations from riskier investment banking units and boost capital levels to protect taxpayers from future crises, according to far-reaching proposals that could cost the industry 7 billion a year. The Greek government announced yesterday that it would impose a twoyear property tax to raise 2 billion this year, closing a 1.7 billion budget gap that the EU and IMF said must be resolved or they would stop making bail-out payments. Frances top banks are bracing themselves for a likely credit rating downgrade from Moodys sources close to the situation said on Saturday. Several sources said that BNP Paribas, Societe Generale and Credit Agricole were expecting an imminent decision from the rating agency, which first put them on review for a possible downgrade on June 15. Chinese inflation is still too high and the country needs to maintain its prudent monetary policy, the central bank said this morning, adding that stabilising overall price levels remains the top priority of macro economic policy. Today, the eco calendar is thin with only the Italian industrial production data. The BIS holds its bimonthly meeting and Germanys Merkel and EUs Barrosso hold crisis talks. 1
KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research
KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research
KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research
Currencies:
Technicals EUR/USD Support comes in at 1.3499 (Reaction low), 1.3447 (Equality Cwave), at 1.3408 (50% Retracement 2010) and at 1.3381/75 (1st target off 1.3968/Weekly envelope). Resistance stands at 1.3622 (Reaction high), at 1.3688 (Broken daily Boll Bottom), at 1.3733/47 (Daily envelope/Weekly envelope), and at 1.3836 (STMA) and at 1.3872 (STMA). The pair is in oversold territory.
On Friday, EUR/USD extended the post-ECB decline. There was also no reason at all to change tactics. The EU policymakers dont give the impression to come closer to a comprehensive solution for the debt crisis. On the contrary. In addition, the euro had lost one of its main assets against most other majors, being (the prospect for) additional interest rate support. At Thursdays meeting, the ECB made clear that the process of normalisation of policy rates has been put on hold. In this respect, a further repositioning out of the single currency should be considered as logical. During the day, sentiment on risk even deteriorated further. EUR/USD dropped already below the key 1.3837 support before noon in Europe. Later in the session, there were rumours in the market that Mr. Stark was to leave ECB because of a conflict over the banks bond buying plan. This added to the overall uncertainty and pushed EUR/USD further south of the key 1.3837. The news of his resignation was confirmed later in the session. At the same time, there were al kinds of other rumours, even on Greece defaulting this weekend. It was difficult to assess the correctness of these rumours. However, it is clear that the tensions are mounting on all kinds of issues and that Germany is becoming ever less clement on Greece. This kind of political risk and chaos made the euro an easy victim. The single currency was heavily sold and EUR/USD closed the session at 1.3656, compared to 1.3882 on Thursday evening. Today, the calendar of eco data is thin. However, this is no precursor for a calm trading session. On the contrary. The key question is whether there is still enough political will in Germany to give further support to Greece (and to other countries). The Greek problem obviously is the most imminent one. Over the weekend, the country took additional measures to reduce its budget deficit. The question is whether they will be considered enough by its sponsors. However, the rift on the ECB bond buying programme illustrates that Germanys unease is much more profound. Germany is on collision course with a big part of the EU and some if its core institutions like the ECB. As long as there is no sign on a solution of this problem, the euro looks extremely vulnerable. In this respect, it will be interesting to see the reaction from Germany on the amount of bond buying as announced by the ECB today. There is still plenty of event risk. In this respect, markets might still be spooked by rumours on a downgrade of the Italian sovereign debt rating (from Moodys). In the same context, there is also speculation on the downgrade of the major French banks due to their exposure on Greece. This smells like an outright euro chaos. So, there is absolutely no reason to row against the euro negative tide. The sell-off might continue at a fast pace. Global context. Since the EU summit on July 21, EUR/USD held within a remarkably tight sideways trading range. The outcome of the meeting was unable to prevent further contagion on the EMU government bond markets. On the contrary, Italy came also in the fire line. In theory, this should have been a negative factor for the euro. However, markets still saw a balance of weakness between the euro and the dollar as the news flow from the US was also far from inspiring. The eco data indicated that the US might be at the brink of a double dip recession and the outcome of the US budget debate illustrated that US policymakers have no comprehensive plan to address the debt situation. S&P downgrading the US AAA-credit rating reinforced this feeling and weighed on the dollar. The Fed committing to extend an extremely accommodative policy at least until 2013 was also no help for the US currency. So, EUR/USD hovered sideways in a range roughly between 1.4050 and 1.4550 in August. However, two weeks ago, sentiment on the euro turned for the worse as the EMU debt crisis came again in the spotlights. EUR/USD started a correction off from the range top. Last week, the news flow on the euro turned further negative. At the ECB press conference, the bank indicated that it changed tactics. There is even a risk of the ECB again cutting rates in the future. This removes an important support for the euro. On Friday, EUR/USD dropped below the key 1.3837 level (12 (July low). Already for quite some time, we indicated that a break below this level might be an indication that some kind of euro panic is building. It looks that we have reached that stage now. The targets of the triple top formation (neckline 1.3968) are seen at 1.3381, at 1.3240 and at 1.2996. We wouldnt be surprised if there targets would be reached rather soon.
KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research
Technicals EUR/GBP Support comes in at 0.8529 (Reaction low), at 0.8476/73 (Weekly envelope/76% retracement), at 0.8455 (62% retracement), at 83.85 (Irr C) and at 0.8285 (Year low). Resistance is seen at 0.8591 (Broken Boll Bottom), at 0.8632 (Daily, envelope) and at 0.8687 (STMA). The pair is slightly overbought territory.
On Friday, trading in the EUR/GBP cross rate was also driven by the euro side of the story. So, EUR/GBP to a very large extent tracked the price swings of the EUR/USD cross rate. The UK PPI data were no factor of importance for trading. The rumours/news on ECBs Stark leaving the ECB pushed EUR/GBP for a test of the key 0.8611 area. The level was extensively tested, but contrary to what happened in EUR/USD, a break of this key level didnt (yet) occur. The pair closed the session at 0.8600, compared to 0.8698 on Thursday. Today, the eco calendar in the UK is again empty. So, the EMU debt crisis will also be the dominant factor for EUR/GBP trading. In this respect, the pair dropped this morning clearly below the 0.8611 support. This is also an important event for EUR/GBP trading as it makes the technical picture negative. However, later this week, the UK eco data are interesting too. We especially watch out for the labour market data and the retails sales. A poor outcome of these series might be seen as pushing the BoE for more QE in the near future. It is not sure that this will stop the decline of EUR/GBP if the panic on the euro-zone debt crisis persists. It will be interesting to see the market reaction. .
KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research
KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research
Calendar
Monday, 12 September Japan 01:50 BSI Large All Industry (QoQ) (3Q) 01:50 BSI Large Manufacturing (QoQ) (3Q) 01:50 Tertiary Industry Index (MoM) (JUL) 01:50 Domestic CGPI (MoM) (YoY) (AUG) Italy 10:00 Industrial Production (MoM) (YoY) (JUL) Portugal 11:00 CPI EU Harmonized (MoM) (YoY) (AUG) Events Bimonthly Meeting of Bank for International Settlements 01:50 BOJ to Publish Minutes of Aug. 4-5 Board Meeting 11:00 EU General Affairs Ministers Meet in Brussels 12:00 Gemanys Merkel and ECs Barrosso hold talks on Crisis 15:30 ECB Calls for Bids in 7-Day Main Refinancing Tender 15:30 ECB Calls for Bids in 1-Month Tender 15:30 ECB Announces Bond Purchases 22:00 Fed's Fisher Speaks on Monetary Policy in Dallas Germany Bubill Auction (4B Mar2012) US 3-Yr Notes Auction ($32B) Consensus --0.2% -0.2%/2.7% 0.2% / - -Previous -22.0 -23.3 1.9% 0.2%/2.9% -0.6% / 0.2% 0.1% / 3.0%
Brussels Research (KBC) Piet Lammens Peter Wuyts Didier Hanesse Joke Mertens Mathias Van der Jeugt Dublin Research (KBC Bank Ireland) Austin Hughes Prague Research (CSOB) Jan Cermak Jan Bures Petr Ba Bratislava Research (CSOB) Marek Gabris Warsaw Research (Kredytbank) Piotr Radzewicz Budapest Research (K&H) Gyorgy Barcza Our reports are also available on: www.kbc.be/dealingroom +36 1 328 99 89 +48 22 6345 946 +421 2 5966 8809 +420 2 6135 3578 +420 2 6135 3574 +420 2 6135 3570 +353 1 6646892 +32 2 417 59 41 +32 2 417 32 35 +32 2 417 59 43 +32 2 417 30 59 +32 2 417 51 94
Brussels Corporate Desk Commercial Desk Institutional Desk +32 2 417 45 82 +32 2 417 53 23 +32 2 417 46 25
+44 207 256 4848 +49 69 756 19372 +33 153 89 83 15 +1 212 541 06 97 +65 533 34 10
+420 2 6135 3535 +421 2 5966 8436 +36 1 328 99 63 +48 22 634 5210 +7 495 228 69 61
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.
KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research