Monday, 19 September 2011

Sunrise Market Commentary

From KBC Market Research Desk - More research on www.kbc.be/dealingroom

Is the correction in bunds already over?

At the end of last week, core bonds came off from the recent highs as investors hoped for some progress on managing the EMU crisis at the EU/EMU meeting in Poland. However, as this hope proved in vain, the bund is heading higher again.

Euro cedes ground as EMU policymakers fail to make a big step forward on the EMU debt crisis
On Friday, most markets were in a wait-and-see mode, looking out for the outcome of the Ecofin meeting in Poland. The euro drifted cautiously lower, reversing part of the gains of Thursdays gains (USD liquidity). At the start of this week, the euro is again fighting an uphill battle as markets are disappointed on the progress on the way to a comprehensive solution for the debt crisis.

News & Calendar: University of Michigan consumer sentiment improves slightly

Sunrise Headlines
S&P Eurostoxx50 Nikkei Oil CRB Gold 2 yr US 10 yr US 2 yr EMU 10 yr EMU EUR/USD USD/JPY EUR/GBP

US Equities rose for a fifth consecutive session on Friday. The S&P was up 5.2% for the week led by technology shares. This morning, optimism faded in Asia with shares trading 1-2% lower. Ministers and central bank governors from the 17 countries using the euro and the broader 27-nation EU met on Friday and Saturday to discuss Europes slowing economic growth and progress in beefing up the euro zone defenses against the sovereign debt crisis, but no new ground was broken. Greeces government held an emergency cabinet meeting yesterday to plan new measures to bring its unruly budget deficit into line after a heated warning from the other euro zone nations over the weekend that its efforts were insufficient and might threaten the delivery of future aid. US President Obama will outline today his blueprint to return the US to fiscal health in a speech. According to administration officials, Obama will unveil a tax reform plan that is tilted against the wealthiest and will cut health programmes for the elderly and save money through the withdrawal of troops from Afghanistan and Iraq. Germanys Social Democrats beat Angela Merkels conservatives in a regional vote in Berlin on Sunday, handing the chancellor her sixth election defeat this year ahead of a key euro zone vote in parliament in two weeks time. The Bank of Englands first round of asset purchases gave the economy a significant boost, but any future quantitative easing may not have the same impact, the Bank of England said in its quarterly bulletin. Today, the eco calendar is thin with only the NAHB housing market index in the US. The Greek finance minister will hold a teleconference with the EU/IMF and ECB. 1

KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research

Monday, 19 September 2011

Sunrise Market Commentary

Markets: Fixed Income

2 5 10 30 2 5 10 30 R2 R1 BUND S1 S2 US yield 0.1732 0.9207 2.0566 3.3177 DE yield 0.4710 0.9450 1.7980 2.6790 138.63 138.01 137.44 136.83 136.60 -1d -0.0239 -0.0275 -0.0262 -0.0293 -1d -0.1260 -0.1490 -0.1400 -0.1710 -1d -8.2600

On Friday, US Treasuries had a very quiet low volume session that ended with modest gains. In early US trading the market tested the downside, apparently on rumours that the Michigan consumer sentiment reading for September would be substantially stronger than expected. However, that was not the case and equities faded following a strong start, Treasuries rebounded from technical support levels to end the session modestly higher (yields fell between 2.4 and 4.3 bps). Price action in the German bond market was livelier, as the Eurogroup meeting in Poland was the scene of multiple positive comments about Greece, Italy, Spain and others. However, the meetings in the end brought few really new items to the fore (see below). After having tested the downside a few times, it seems markets decided that the sharp sell-off in the previous three days had gone far enough and thus Bunds climbed higher in mid US session and stabilized further out. The higher volatility in the German versus the US market of recent resulted now in a sharp outperformance of German bunds (yields down between 6.6 and 11.8 bps, wings outperforming belly). In the intra-EMU bond universe, 10-year yield spreads versus Germany narrowed acoss countries, but the narrowing was limited for most credits with the exception of Belgian and Greek yield spreads. The former (-15 bps) still profited from Thursdays news that the coalition negotiations had made progress as an important partial agreement on BHV had been reached. The latter dropped 161 bps (to 1932 bps), the second day in a row the spread plunged. It suggests that risks on a near term default have fallen, but the declines follow steep widening in the days before. The eurogroup and Ecofin meetings in Poland on Friday and Saturday caught much attention. Political leaders and ECBs Trichet sounded upbeat on the agreement on the future governance in the euro area. There was an agreement on the so-called six-pack rules on budgetary discipline and macro-economic imbalances. However, that may be important to get better fiscal and macro-economic policy in future, there was little news about the way to solve the current debt problems. US Treasury Secretary Geithner attended the meeting and urged European policymakers to use the tools at their disposal to solve once and for all the debt problems. He pleaded for fiscal stimulus and for a creative use of the EFSF, notably the leverage of the EFSF limited fire powder via the ECB. His ideas got a cool reception. Eurogroups Juncker said that the consolidation of fiscal policy got priority and only those countries that had healthy finances could make use of the automatic stabilisators. No word about real discretionary stimulus of e.g. Germany. The leveraging of the EFSF was immediately rejected by Bundesbank president Weidmann who called monetary financing of governments by the ECB unlawful and added that the EFSF was no bank and thus not allowed to use the ECB to liquidy its bond purchases. Similarly on Greece, Commissioner Rehn put the country under still more pressure repeating that the country needed to fufill its fiscal targets despite lowerthan-expected growth. The Greek government pledged yesterday to take the tough decisions needed to avoid default, but announced no new austerity measures. Today, there is a teleconference planned between the Greek finance minister and the Troika. The October 3 Eurogroup meeting could take a decision on the basis of the Troika report after which Greece would receive the funds by mid-October. Policymakers promised that the EFSF legislation (including precautionary credit lines, secundary bond market buying and recapitulation financial institution) would be in place by mid October. Trichet called it absolutely necessary that all promises made on July 21 would be put into national law and implemented rapidly. Interestingly, it was decided that the pricing of the (also future) EFSF loans would be based on the EFSF funding cost plus the operational costs. This shows how far minds have evolved since the penalising loans Greece, Portugal and Ireland received. After the build up of hope last week that the Ministers of Finance would take decisive steps to solve the debt crisis, the result of the meetings are disappointing. The un-

Technicals Dec! Bund The LT technical picture of the Bund is bullish. The chart showed a bearish engulfing reversal last week and this triggered a correction last week. However, for now this is nothing more than a correction. On the downside, support stands at 136.83 (S1, Gap open), at 1.3680 (MTMA), at 136.24(Break-up hourly) and at 1.35.69 (Reaction low hourly + weekly envelope). On the topside, resistance stands at 137.48 (R1, Reaction high hourly), at 138.01 (R2, 76% retracement), at 138.63 (R3, Weekly envelope) and at 138.91 (reaction high) and 1.3912 (Daily Boll top). The contract is in neutral conditions.

KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research

Monday, 19 September 2011

Sunrise Market Commentary

certainty on the approval of EFSF remains alive (no agreement on collateral issue either), as is the ability of Greece to obtain the next tranche of its loan and the 90% qoutum on the PSI (volontary debt exchange/roll over). This may keep markets nervous. The defeat of Angela Merkels coalition in regional elections in Berlin will also not help to restore market confidence. Regarding bond markets today and further out this week, the eco calendar is empty, but some attention will go out to the weekly SMP bond buying of the ECB. The parliamentary hearing of ECB Weifmann and EFSF Regling in the Bundestag might be interesting too. However, the markets will get a better opportunity to react to the Eurogroup results. After the return of appetite last week on hopes that bold decisions would be taken, some disappointment may reign on which German bonds may capitalize. However, it is possible that markets wont be too pessimistic at the start of the week. Indeed, the FOMC meeting that concludes on Wednesday might make markets shy taking outspoken positions and also the IMF/World bank meetings that start on Friday could still surprise by global action to quell the crisis in the European bond markets, even if such an event is a low risk one. .

Bund Future: correction blocked as EMU policy makers fail to make substantial progress to address the debt crisis .

KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research

Monday, 19 September 2011

Sunrise Market Commentary

Currencies:
R2 R1 EUR/USD S1 S2 1.3753 1.3706 1.3677 1.3636 1.359 -1d -0.0181

Technicals EUR/USD Support comes in at 1.3636 ((Reaction low), at 1.3590 (Reaction low), at 1.3556 (Reaction low hourly), at 1.3499 (Reaction low), at 1.3447 (Eq. C-wave) and at 1.3408/81 (50% Retracement of from 2010/1st target triple top). Resistance stands at 1.3706 (reaction high hourly), at 1.3753 (STMA), at 1.3784/94 (Gap hourly/Weekly envelope) and at 1.3883 (MTMA). The pair is in neutral territory.

The euro lost slightly ground on Friday. The move should be considered as a partial reversal of the strong gains on the announcement on Thursday of joined action of the major central bankers provide dollar liquidity. However, this issue was only a small part of the broader EMU crisis that needed to be addressed. In this respect, markets keep a close eye on the headlines from the Ecofin meeting in Poland. EUR/USD kept a rather sideways trading range in the 1.3800 area for most of the day. Early in the US, EUR/USD gained a few ticks as there was some optimism on rumours that the Michigan consumer confidence would come out strong, but the these rumours proved to be incorrect. Toward the end of the European trading session, the focus again tuned the European banking crisis. So, EUR/USD returned to the levels seen earlier in Europe and closed the session at 1.3797, compared to 1.3877 on Thursday evening. Late on Friday and on Saturday, the EMU Finance Ministers again discussed several issues of the EMU debt crisis. There has been made some progress, e.g. on the sixpack issue, reinforcing the framework for policy coordination in the future. However, this is no answer to what markets are asking for at this stage. The suggestions of US Treasury Secretary Geithner to leverage the EFSF or to boost the economy by more fiscal stimulus (e.g. in Germany) found little support. EU leaders reiterated that Greece must meet the conditions that were agreed upon in order to get further support. In addition, German Chancellors party faced another defeat at regional elections in Berlin this weekend. This wont make things easier for the German Chancellor to convince her coalition on more support for indebted EMU countries. So, the odds are for ongoing uncertainty and nervousness on the EMU debt crisis at the start of this new trading week. EUR/USD is seen in the mid 1.36 area at the moment of writing. Today, the calendar of eco data is again thin with only some second tier eco data scheduled for release. So, the focus will again be on the fall-out of the Ecofin meeting in Poland. As indicated earlier, the results of this meeting will probably not be enough to ease market uncertainty on the EMU debt crisis. In this context, we assume that sentiment on risk will remain fragile and the tensions on the EMU markets will persist. So, we can not but put the risks for EUR/USD to the downside. Later today, markets will look out for the amount of bond purchases by the ECB. Later this week the focus will be on the Fed meeting. It is probably too early for the Fed to take bold steps, but the hopes might prevent a too negative positioning of the markets. Some investors might also hope on a sign of coordinated action from the IMF/World bank meeting at the end of this week. However, we doubt that these will be enough to take away to deep-rooted uncertainty on the EMU debt crisis. So, we expect that the euro will continue to fight an uphill battle. Global context. After 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. 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, US policymakers had no comprehensive plan to address the debt situation and S&P downgraded the US AAA-credit rating. All this 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. Two weeks ago, the EMU debt crisis came again in the spotlights. EUR/USD started a correction off from the range top. 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 and 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 reached that stage , even as the tension eased temporary at the end of last week. The targets of the triple top formation (neckline 1.3968) are seen at 1.3381, at 1.3240 and at 1.2996. At the end of last week EUR/USD tempo4

KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research

Monday, 19 September 2011

Sunrise Market Commentary

rary regained the 1.3837 range bottom, the rebound could no be sustained. We maintain our sell-on-upticks approach.

EUR/USD: euro rebound short-lived as EU policymakers fail to make substantial progress on the EMU debt crisis.

R2 R1 EUR/GBP S1 S2

0.8741 0.8724 0.8706 0.868 0.8653

-1d -0.0061

On Friday, EUR/GBP returned the gains recorded after the announcement on Thursday of coordinated central bank action to provide dollar liquidity. There were no important eco data on the agenda in the UK. So, the price action in EUR/GBP was driven by global factors and the headlines on the EMU debt crisis. The pair showed a steady decline throughout the session and closed the week at 0.8741, compared to 0.8782 on Thursday. Over the weekend, the headlines/results from the Ecofin meeting in Poland failed to spark much enthusiasm on the markets. The same was true for the outcome of the Regional elections in Berlin. Overnight, the Rightmove House Prices came out materially better than expected. Al this put the EUR/GBP cross rate under pressure. The pair is seen in the 0.8700 area at the moment of writing. Today, eco calendar in the UK is empty. So, global sentiment on risk and the euro side of the story will set the tone for EUR/GBP trading. Disappointment on the outcome of the EMU summit in Poland might cause a further reversal after last weeks EUR/GBP gains. Later this week, the minutes of the previous BoE meeting might be important for sterling trading as they will indicated to what extent BoE policy markets are inclined to more QE. Global picture. The 21 July agreement was no big support for the single currency as contagion also hit the Italian bond market. EUR/GBP reached a correction low at 0.8643 early August. However, the key 0.8611 level stayed out of reach. The ECB buying Italian and Spanish bonds eased the tensions on the intra-EMU bond markets and the euro entered calmer waters. Regarding the UK side of the story, there is a decent chance that the BoE will enlarge its program of asset purchases in case UK economic growth remains weak. The risk of more QE in the UK capped any gains of the UK currency. We had a LT EUR/GBP bullish view as we expected the BoE to keep its policy loose for a prolonged period of time while the ECB was trying to bring its policy rate to a more normal level. However, the ECB normalization process is obviously put on hold sine die and even a rate cut might again come on the agenda. This changed the balance between the BoE and the ECB. The flaring up of the EMU crisis pushed EUR/GBP (temporary) below the key 0.8611 range bottom. This obliged us to change our strategy in this cross rate. Euro skepticism clearly outweighed uncertainty on more QE. However, the price action last week showed that the downside risk in this cross rate is materially lower compared to the potential losses in EUR/USD in case the EMU debt crisis would flair up/derail. The downside 5

Technicals EUR/GBP Support comes in at 0.8684 (Reaction low), at 0.8653/38 (Reaction lows), at 0.8610/01 (Daily Boll Bottom/Daily uptrend line), at 0.8531/25 (Last week low/daily Starc bottom). Resistance is seen at 0.8724/41 (MTMA/Reaction highly hourly), at 0.8763 (50 D MA) and at 0.8790/94 (Reaction high/weekly envelope). The pair is in neutral territory.

KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research

Monday, 19 September 2011

Sunrise Market Commentary

in this cross rate has also become vulnerable. However, if the Minutes ould indicate that the BoE is heading for more QE, the 0.8530/0.8611 are might provide decent support.

EUR/GBP: Rebound slows as polic makers make no big progress on the EMU debt crisis.

KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research

Monday, 19 September 2011

Sunrise Market Commentary

News
US: consumer sentiment improves slightly
According to the first estimate, University of Michigan consumer confidence improved from 55.7 to 57.8 in September, after the collapse in August. The outcome was slightly above the consensus. The details show that the improvement in sentiment was only due to a rebound in the economic conditions sub-index (74.5 from 68.7), while the economic outlook index weakened further (from 47.4 to 47.0). The further worsening in the expectations component suggests that consumers are increasingly worried about the economic outlook as fears for a double dip recession grew recently. Also inflation expectations picked up both 1- and 5-year ahead. For us the outcome is slightly disappointing as we were hoping for a bigger improvement and as consumers grew increasingly worried about the economic outlook, which might encourage them to cut spending further in the coming months.

EMU: trade deficit stable, imports & exports rebound

In July, the euro zone seasonally adjusted trade balance was unchanged from the previous month. The deficit stayed unchanged at a revised 2.5 billion (previously reported as a shortage of 1.6 billion) in July. The details are encouraging as both exports (2.0% M/M) and imports (1.9% M/M) rebounded in July, after a sharp decline in June. The increase in both imports and exports is an encouraging signs suggesting that activity picked up at the start of the second quarter, after growth came almost to standstill in the second quarter.

Calendar
Monday, 19 September US 16:00 UK 01:01 EMU 11:00 Events 01:01 10:00 10:30 11:30 15:00 15:30 15:30 Slovakia Consensus NAHB Housing Market Index (SEP) Rightmove House Prices (MoM) (YoY) (SEP) Construction Output MoM YoY (JUL) Japanese markets are closed in observance of Respect-for-the-Aged Holiday Greek Finance Minister holds teleconference with the IMF/EU and ECB Bank of England Publishes Quarterly Bulletin ECB's Liikanen Speaks at Bank of Finland Quarterly Briefing Brazil's Tombini, Bank of ECBs Costa Speak at Conference Weidmann, Regling at Open Parliamentary Hearing on Crisis ECB's Gonzalez-Paramo Speaks in Frankfurt ECB Calls for Bids in 7-Day Main Refinancing Tender ECB Announces Bond Purchases Bond Auction (4% Apr2020) 15 A 0.7%/1.5% -Previous 15 -2.1%/-0.3%
-1.8%/-11.3%

KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research

Monday, 19 September 2011

Sunrise Market Commentary

10-year
td 2.06 1.80 3.68 2.49 1.01 EUR 1.524 1.898 2.475 - 1d -0.03 -0.14 -0.24 -0.03 0.00 USD (3M) 0.641 1.182 2.183 - 1d -0.0181 0.06 -0.0103 -0.0103 0.0002 GBP 1.308 1.701 2.627

US DE BE UK JP

US DE BE UK JP

2 -year

td 0.17 0.47 1.95 0.52 0.17 1.11 1.35 1.54 1.74

- 1d -0.02 -0.13 -0.27 0.00 0.00

DOW NASDAQ NIKKEI DAX DJ euro-50

STOCKS

11509.24 0.00 8864.16 5573.51 2159.28

- 1d 76.21 0.00 0.00 65.27 3.66

3y 5y 10y

IRS

Eonia Euribor-1 Euribor-3 Euribor-6

0.16 0.01 Libor-1 0.00 Libor-3 0.00 Libor-6 - 1d Commodities -1.27 -0.0061 - 1d -0.0007 0.05 0.00

0.673 0.919 1.201 CRB 329.55 -3.05

0.00 0.00 0.00 GOLD 1821.34 51.84 BRENT 111.38 -1.48

EUR/USD USD/JPY GBP/USD AUD/USD USD/CAD

Currencies

1.3677 76.875 1.5702 1.0233 0.9837

EUR/JPY EUR/GBP EUR/CHF EUR/SEK EUR/NOK

Currencies

105.13 0.8706 1.2064 9.163 7.7095

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

Global Sales Force

Brussels Corporate Desk Commercial Desk Institutional Desk +32 2 417 45 82 +32 2 417 53 23 +32 2 417 46 25

London Frankfurt Paris New York Singapore

+44 207 256 4848 +49 69 756 19372 +33 153 89 83 15 +1 212 541 06 97 +65 533 34 10

Prague Bratislava Budapest Warsaw Moscow

+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