Monday, 31 October 2011

Sunrise Market Commentary

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

Bonds correct after the sharp Summit sell-off

Global core bonds edged higher after Thursdays sharp sell off. End of month extension buying might have played a role too. This week, the eco calendar is back-loaded with a lot of important US eco data releases (ISM, payrolls), a G20 meeting and central bank meetings in the US and EMU.

BOJ Yen intervention pushes USD/JPY to above 79.

After USD/JPY slid to new all-time lows at the start of trading, the BOJ intervened forcefully pushing its currency substantially lower. The dollar strengthened after the move across the board. However, the BOJ acted solo, putting doubts on the sustainability of the initial success.

News & Calendar: Belgian economy came to standstill in Q3

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

After strong gains in Thursday, US Equities stayed broadly unchanged on Friday. The S&P ended the session marginally up led by gains in materials and energy shares. This morning, most Asian shares start the week in negative territory. Japan intervened this morning by selling the yen for the second time in less than three months after it hit another record high against the US dollar, saying it intervened to counter speculative moves that were hurting the economy. USD/JPY jumped from levels around 75.60 to 79.50. Both Fitch and S&P assigned the AAA rating to the European Financial Stability Facilitys amended debt programme. The head of Europes bailout fund Regling, on a tour in Asia for potential investors, said this morning he has been reassured by Japans top currency official that Tokyo would continue to buy its bonds. The International Monetary Fund said yesterday that it was considering how to better help countries under economic strain because of financial market stress but added that it was not targeting particular countries. German retail sales rebounded less than expected in September, gaining only 0.4% M/M after a 2.5% M/M plunge in August, as consumer mood remained subdued. Japans manufacturing PMI rebounded in October due to an increase in output at auto makers, but some companies warned that the rising yen and a slowdown in China are hurting external demand. Today, the eco calendar contains the first estimate of euro zone HICP inflation, the euro zone unemployment rate and Chicago PMI in the US.

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

Monday, 31 October 2011

Sunrise Market Commentary

Markets: Fixed Income

2 5 10 30 US yield 0,2931 1,0966 2,2896 3,3475 -1d -0,0157 -0,0728 -0,0704 -0,0697

2 5 10 30

DE yield 0,5980 1,2930 2,1660 2,9140

-1d -0,0700 -0,0720 -0,0610 -0,0610

On Friday, global core bonds recovered a part of Thursdays sharp post EMUSummit losses. At the start of the European session bonds reached intraday lows but than started their march higher, almost unabatedly. End of month extension buying might have been a supportive factor. The eco calendar was uneventful and didnt play a role on markets. At the end of the session, the German yield curve bull steepened. Changes were respectively -5.4 bps, -4.5 bps, -2.9 bps and -2.3 bps for the 2, 5- ,10- and 30-year tenor. In the US, yields dropped +- 8 bps across the curve (without taking into account the 2-year yield). On EMU bond markets, Thursdays euphoria after the Summit also faded. Spreads against Germany increased significantly for Spain, Italy and Belgium. The Spanish spread added 21 bps, the Italian 18 bps and the Belgium 13 bps. In Italy, the spread increased before and after the BTP-auctions (see below), even despite ECBinterventions. The 10-year Italian nominal yield is back above the 6%-mark. The widening in Belgium was probably partly due to some selling ahead of todays auction. In Germany, a revision of the public accounts revealed that an accounting mistake led to an embarrassing 55.5B overstatement of the debt burden. According to the FM, revised figures would now show debt to GDP of 83.2% in 2010 and 81.1% in 2011 (down from 84.2% and 83.7%)

T-Note future (black) & S&P future (orange) (intra-day) bonds corrected after Thursdays sell-off.

Italian 10-year nominal yield: investors are not at all convinced that Italy is off the hook. Despite ECB intervention, Italian bonds couldnt really profit and the yield is back above the 6%-mark.

Friday, the Italian debt agency tapped the on the run 3-year BTP (3.08B 4.25% Jul2014); the off the run 10-year BTP (0.87B 4.25% Sep2019), the on the run 10year BTP (2.98 5% Mar2022) and the off the run 7-year CCTeu (1B Euribor +0.8% Oct2017). The total amount sold (7.93B) was close to the maximum of the intended range (5.25-8.25B) but despite the relatively low offered amount bid covers were rather low. It is clear that Thursdays EMU Summit outcome is not yet enough to bring investors back to the auctions. The Italian nominal yield also increased ahead and after the BTP-auctions despite ECB intervention, which points to further selling pressure. Regarding Italian (and Spanish) bond auctions in general, the message is thus still the same. Demand is still domestically driven as private investor demand for Italian (and Spanish) bonds remains very low. Today, the Belgian treasury sells 1.7-2.7B OLOs by tapping the off the run 5-year OLO 54 (4% Mar2014 ); the on the run 5-year OLO 63 (3.5% Jun2017) and the on the run 102 KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research

R2 R1 BUND S1 S2

134,72 134,51 134,3 132,89 1,32

-1d 0,0000

Today, the EMU eco calendar contains the euro zone CPI data for October. In the US, the Chicago PMI is scheduled for release. The Belgium debt agency taps the market.

Monday, 31 October 2011

Sunrise Market Commentary

Technicals Dec Bund The LT picture has lost its bullish character after a triple top configuration was confirmed Targets of the figure are in the vicinity of 131. The EMU Summit caused a sell-off that threatens now the key 132.94 level. A sustained break of the latter would suggest bonds have more ground to cede. On the downside, support stands at 132.89 (S1, new reaction low off high), at 132.73/64 (S2, Bollinger bottom/ Sept 1 low), at 132.35 (S3, Aug 31 low), at 132.03 (S4, Irregular C off 138.80). On the topside, resistance stands at 134.51/65 (R1, STMA/MTMA), at 134.72 (R2, breakdown daily), at 135.01 (R3, gap hourly), at 135.65 (R3, Bollinger midline), The contract is in near oversold conditions.

year OLO 61 (4.25% Sep2021). The auctions will normally be covered because of the rather low offered amount, which is also split on three lines. In general, Belgian bonds started trading more in line with core EMU bonds after the political deadlock ended mid-September. The nationalisation of Dexia and extra state guarantees for its bad bank temporary interrupted this move but we still see upward potential for Belgian bonds to reconnect to the core because of Belgiums strong underlying macroeconomic fundamentals. An agreement between negotiation parties, including on a multi-year austerity package, to form a government might give Belgian bonds a boost. Regarding bond markets this week, the calendar is back loaded. Today only euro zone CPI and US Chicago PMI are scheduled for release. Especially the CPI release will be interesting but probably easily digestible for markets. Tomorrow, a lot of European markets are closed (including Germany) which makes us believe that volumes will be even lower than on other Mondays and can cause sharp moves. The BOJ interventions are causing some renewed risk aversion from which the Bund profits at the start of trading, at the expense of non-core bonds. . Further down the week the FOMC and ECB meetings will be of the essence. In the US, several governors pointed in the direction of increasing support for the housing market, but it might be too early to expect already a QE-3 directed to MBS-paper. With regard to Thursdays ECB meeting, we dont expect new president Draghi to cut rates at his first appearance but however leave the door open to a cut later this year. For a more detailed analysis, wed like to refer to our flash report which will appear on www.kbcdealingroom.com later today). The eco calendar also heats up later this week with the US manufacturing and non-manufacturing ISMs, the ADP employment change and the payrolls scheduled for release. The outcome of these metrics will give us a better view on how big the recession threat is. Finally, Thursday and Friday the G20 meeting, with the focus on EMU, is scheduled. A concrete outcome is not expected, apart from statements about the actions EMU leaders took at last weeks EMU summit but maybe we hear some commitments from G20 countries to participate in the EFSF 3.0.

Bund future (Dec): Key support at 132.94 saved for now, as some return action occurs.

Dec Note Future: failed test key support (128.11)

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

Monday, 31 October 2011

Sunrise Market Commentary

Currencies: BOJ Yen intervention pushes USD/JPY to above 79.

R2 R1 EUR/USD S1 S2 1,4055 1,4017 1,3998 1,3976 1,3915 -1d -0,0192

On Friday, there was a the-day-after feeling on most markets and trading in EUR/USD was no exception. After the spectacular gains in the wake of the EMU Summit, the relief rally was a bit exhausted and some players booked profits or squared positions ahead of month end. This was the case for the equity markets and for EUR/USD. The pair closed the session and week at 1.4148, 40 ticks down on Thursdays close, but up from previous Fridays close of 1.3897. The EUR/USD cross rate traded in the 1.4175 area at the start trading in Europe and when an initial attempt to break above 1.42 failed, the pair slid in a narrow sideways range between 1.4190 and 1.4135. European equities tried to extend the gains from Thursday, but also here some, albeit insignificant, profit taking ultimately occurred. The only factor of minor importance was an Italian bond auction, which went difficult, but with limited impact on EUR/USD trading. The US eco data were mixed, but didnt affect trading. This week is the first calendar week of a new month and thus rich in economic data. In addition, the Fed and the ECB will hold their policy meetings. Today, the European inflation data will be published. Inflation is not super-important for currency trading, but in the run-up to the ECB meeting, currency traders might keep an eye on it. A stronger than expected figure (an outcome of more than 3% might fuel the feeling that the ECB wont cut interest rates anytime soon), but we think that even in that case an easing of ECB policy is on the cards. However, we dont expect it to occur at the November meeting, even if inflation is in line with expectations for a small decline (see our flash that will be released later today). In the US, the Chicago PMI is a wildcard for trading. A small decline to 59.00 from 60.4 is expected. A decent figure might by supportive for risk and for EUR/USD. However, the impact of this indictor on EUR/USD trading will also only be of intraday significance, at best. Regarding the Fed meeting, the focus will be on the communication policy. Will the Fed announce an inflation target? How will they formulate their forward looking guidance? By adapting from time to time the fixed date (now mid 2013) it expects to keep rates at very low levels. Or will it make changes depended on reaching some targets, like the suggestion of Chicago Fed president Evans. To keep rates at rock bottom levels as long as the unemployment rate is above 7% and on condition inflation stays below 3%. Of late, some Fed members indicated that the Fed was contemplating to take action to support the housing mortgage market. Any indications that the Fed is preparing more QE would put additional pressure on the dollar. We think that it is too early for the Fed to take new steps, given that it only recently put in place its operation twist and the better eco data, but would there be some hints in that direction, the dollar would be under more pressure. In the current environment, it is reasonable to expect that the dollar will continue to fight an uphill battle in the run-up to the Fed meeting.

Technicals EUR/USD Support comes in 1.3976/75 (break-up daily/today low), at 1.3915 (break-up hourly), and at 1.3898 (MTMA). Resistance stands at 1.4254(62% retracement off year high), at 1.4359 (Breakdown daily August), at 1.4516 (78% retracement). The pair is in overbought territory.

EUR/USD: break higher, but Japanese interventions give the dollar some overall strength.
KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research

Monday, 31 October 2011

Sunrise Market Commentary

Overnight, the Japanese authorities stepped into the market and sold yen after it hit another record high against the dollar (see Japanese part). The dollar rally against the yen on the interventions spilled understandably over into EUR/USD that changes hands just below the 1.40 mark at the time of writing from opening levels at 1.4150. Looking at the technical picture, the pair is now again in the old sideways trading pattern roughly between 1.40 and 1.4550. Once the recent rally is digested, some further EUR/USD gains within this range are not excluded,. The Japanese intervention may temporary boost the dollar against the euro, but it shouldnt be sustainable gains and it may allow dollar bears to set up new dollar shorts. On Friday, the USD/JPY pair closed the session at 75.82, compared to 75.95 on Thursday evening. In yet another boring session, the pressure on the USD/JPY pair remained firmly on the downside, as the pair tested all-time lows almost every day in the past weeks. Overnight, the inevitable happened. When USD/JPY slid below the lows, the BOJ on demand of the Minister of Finance couldnt sit idle anymore and intervened pushing the pair up to 79. Finance Minister Azumi said the intervention was a solo act that would continue until it was satisfied with the results. No amounts were communicated, but it seems that buying occurred in three waves. Some market participants guess the BOJ spend about 5.5 T yen. Azumi added that while it was a solo act, he was in frequent contact with other countries. PM Noda added that excessive FX moves have a destabilising impact and that the intervention was to prevent downward eco risks from realizing. Markets are contemplating whether Japan wants to set a floor on its currency, like the Swiss did some time ago. On August 4, the BOJ intervened too, pushing the USD/JPY pair up briefly to 80.25 from 77.10. It looks as if the BOJ is more serious in its attempt to push the yen weaker against the dollar than in August. However, it remains to be seen whether the BOJ action can be sustained. Key for the pair is the situation in the US. More QE would inevitably weaken the dollar overall. Only expectations that the Fed has done with easing its policy and a tightening becomes realistic, the tide may change more fundamentally. It will now be interesting whether the BOJ will do some follow up buying when trading starts in Europe and later on the US. During most of the summer, USD/JPY was under pressure mirroring global dollar weakness while the yen continued to enjoy an ongoing safe haven bid. The BOJ made clear that it stands ready to step in the market in case of further yen gains, which effectively occurred overnight. Will it really be able to change the course of events in a fundamental way? We dont see a trigger to change the current framework for USD/JPY trading. In September/early October, the dollar was in better shape even as US monetary policy suggests ongoing global dollar weakness. However, this broader dollar rebound was hardly visible in the USD/JPY cross rate. Any upticks soon met selling interest.

R2 R1 USD/JPY S1 S2

-1d 79 3,1450

Technicals USD/JPY Support comes in at 78.01 (broken Daily Boll top), at 76.72 (broken Bollinger mid-line) and at 76.60/67/68 (STMA/MTMA/LTMA). Resistance is seen at 79.53 (Post intervention high), at 80.24 (Aug 4 high) and at 81.48 (8 July high). .

USD/JPY: BOJ cannot watch it any longer and intervenes by selling yen for dollars.

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

Monday, 31 October 2011

Sunrise Market Commentary

R2 R1 EUR/GBP S1 S2 0,8886 0,8795 0,8762 0,867 0,8635 -1d -0,0054

On Friday morning, EUR/GBP opened at 0.8800+ levels. So, the pair was north of the 0.8795 neckline of a double bottom formation. However, there were no followthrough gains on Thursdays level. The news flow from the UK was thin. Later in the session, EUR/GBP joined the correction that was seen in most other markets. The pair dropped below the 0.88 mark in afternoon trading, but the jury is still out to which side of the 0.88 barrier the EUR/GBP balance will tilt. The pair closed the session at compared to 0.8814 on Thursday evening. Overnight, the BOJ interventions had little impact on the EUR/GBP cross. Today, the UK money supply and lending data will be published. Usually they are no big issue for sterling trading. So, the focus for EUR/GBP traders will go out to the technical picture. Global picture. In August/September the EMU debt crisis came again to the forefront. In addition, at the September meeting, the ECB put the normalization process of its policy rate on hold and even a rate cut is again possible. This changed, at least temporary, the balance between the euro and sterling. EUR/GBP dropped (temporary) below the key 0.8611 range bottom. Euro skepticism, at least temporary, outweighed uncertainty on more UK QE. Still, the downside pressure in EUR/GBP remained much more contained compared to the potential losses in EUR/USD in case the EMU debt crisis would worsen. In this context, we favoured a scenario of EUR/GBP holding the sideways trading pattern between 0.8531 and 0.8800. The bottom was under heavy pressure early October but the test was rejected. The October BoE decision to raise the amount of asset purchases pushed EUR/GBP again higher in the established trading range. A broader rebound of the euro in the run-up to the EU summit triggered further gains in EUR/GBP too. The pair tested the key 0.8795 neckline early last week, but the test was rejected. The pair tested several times the 0.8670/75 area over the previous days, but a break didnt succeed. This triggered a rebound into the 0.87 area and the pair is now extensively testing the range top. Sustained trading above this level would improve the short-term picture in this cross rate, too. .

Technicals EUR/GBP Support comes in at 0.8742/39 (STMA/MTMA), at 0.8712/18 (LTMA/Bollinger mid-line), at 0.8742/39 (STMA/MTMA) and at 0.8670 (21 Oct low) and 0.8635 (break-up hourly). Resistance is seen at 0.8831/42 (27 Oct high/6 sep high), at 0.8872 (62 % retracement year high), at 0.8886 (Aug. high) and at 0.8953 (76% retracement). . The pair is in overbought territory.

EUR/GBP: test key 0.88 area failed?

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

Monday, 31 October 2011

Sunrise Market Commentary

News
US: Michigan consumer confidence upwardly revised
The final figure of October University of Michigan consumer confidence showed a significant upward revision compared to the first reading. Michigan consumer sentiment was upwardly revised from 57.5 to 60.9, compared with a reading of 59.4 in September, while the consensus was looking for only a slight upward adjustment. The details show an upward revision in both the economic conditions (75.1 from 73.8) and economic outlook (51.8 from 47.0) sub-indices. Both Michigan and Conference Boards consumer confidence remain however at depressed levels. This upward revision in the Michigans reading might be an indication that also the Conference Boards recent dismal reading will improve somewhat in the coming months.

EMU: Belgian economy came to standstill in Q3

After a decent performance in the second quarter, Belgian economic growth came to a standstill in the three months to September. Also second quarter growth was slightly downwardly revised from 0.5% Q/Q to 0.4% Q/Q. This outcome provides further evidence that the euro zone economy is struggling to stay out of recession. German GDP might be stronger in the third quarter, after an extremely poor second quarter, but the outlook for the fourth quarter is bleak and the euro zone economy will likely contract in the last three months of the year.

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

Monday, 31 October 2011

Sunrise Market Commentary

Calendar
Monday, 31 October US 14:45 Canada 13:30 13:30 Japan 00:15 06:00 06:00 06:00 UK 01:01 10:30 10:30 10:30 10:30 EMU 11:00 11:00 Germany 08:00 France 08:45 Italy 10:00 11:00 Belgium Spain 09:00 Norway 10:00 10:00 Sweden 09:30 Switzerland 09:30 Events 07:30 11:15 11:30 Consensus Chicago Purchasing Manager (OCT) Industrial Product Price MoM (SEP) Gross Domestic Product MoM / YoY (AUG) Markit/JMMA Manufacturing PMI (OCT) Construction Orders (YoY) (SEP) Annualized Housing Starts (SEP) Housing Starts (YoY) (SEP) Hometrack Housing Survey (MoM) (YoY) (OCT) Net Consumer Credit (SEP) Net Lending Sec. on Dwellings (SEP) Mortgage Approvals (SEP) M4 Money Supply (MoM) (YoY) (SEP) CPI Estimate (YoY) (OCT) Unemployment Rate (SEP) Retail Sales (MoM) (YoY) (SEP) Producer Prices (MoM) (YoY) (SEP) Unemployment Rate (SA) (SEP P) CPI - EU Harmonized (MoM) (YoY) (OCT P) Unemployment Rate (s.a) (SEP) Total Housing Permits (MoM) / (YoY) Credit Indicator Growth (YoY) (SEP) Retail sales - vol sa (MoM) (YoY) (SEP) Wages - Non-Manual Workers YoY (AUG) PMI Manufacturing (OCT) Swiss National Bank Publishes Quarterly Results ECB Announces Allotment in 8-Day Main Refinancing Tender Belgium Auction (1.7-2.7B, OLO 54 4% Mar2014 & OLO 63 3.5% Jun2017 & OLO 61 4.25% Sep2021) 59.0 0.1% 0.2%/- A 50.6 A -9.3% A 0.745M A -10.8%
A-0.2%/-2.8%

Previous 60.4 0.5% 0.3%/2.3% 49.3 9.3% 0.934M 14.0% -0.1%/-3.5% 0.5B 0.6B 52.4K -0.2%/-0.6% 3.0% 10.0% -2.9%/2.2% 0.0%/6.3% 7.9% 2.0%/3.6% 6.8%
-11.9%/-12.7%

0.4B 0.5B 50.0K - -/- 2.8% 10.0% A0.4%/0.3% - -/- -- -/3.4% -- -/- -0.2%/- -47.7

6.5% 1.3%/7.6% 2.1% 48.2

10-year
US DE BE UK JP

td 2,29 2,17 4,33 2,64 1,05 EUR 1,677 2,050 2,677

- 1d -0,07 -0,06 0,07 0,00 0,00 USD (3M) 0,766 1,370 2,429 - 1d -0,0192 3,15 -0,0116 -0,0131 0,0085 GBP 1,505 1,934 2,825

US DE BE UK JP

2 -year

td 0,29 0,60 2,43 0,53 0,22 0,92 1,37 1,59 1,79

- 1d -0,02 -0,07 0,13 -0,06 0,00

DOW NASDAQ NIKKEI DAX DJ euro-50

STOCKS

12231,03 0,00 8988,39 6346,19 2462,36

- 1d 22,55 0,00 -62,08 8,35 -14,56

IRS
3y 5y 10y

Eonia Euribor-1 Euribor-3 Euribor-6

0,00 0,00 Libor-1 0,00 Libor-3 0,00 Libor-6 - 1d Commodities 2,98 -0,0054 - 1d -0,0017 0,03 0,01

0,706 0,987 1,268 CRB 323,07 -1,20

0,00 0,00 0,00 GOLD 1707,2 -34,00 BRENT 109,25 -2,50

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

1,3998 79 1,5975 1,0546 0,9999

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

Currencies

110,6 0,8762 1,2204 9,0297 7,6800

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

Monday, 31 October 2011

Sunrise Market Commentary

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
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.

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