KBC Banking Morning Sunrise Market Commentary 09-19-2011

8/4/2019 KBC Banking Morning Sunrise Market Commentary 09-19-2011

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

KBC Bank N.V. - Treasury and Capital Markets Front Office, Market Research 1

Monday, 19 September 2011

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 managingthe EMU crisis at the EU/EMU meeting in Poland. However, as this hope proved in vain, the bund is heading higheragain.

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. Theeuro drifted cautiously lower, reversing part of the gains of Thursdays gains (USD liquidity). At the start of this week, theeuro is again fighting an uphill battle as markets are disappointed on the progress on the way to a comprehensive solu-tion for the debt crisis.

News & Calendar: University of Michigan consumer sentiment improves slightly

Sunrise Headlines

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 withshares trading 1-2% lower.

Ministers and central bank governors from the 17 countries using the euroand the broader 27-nation EU met on Friday and Saturday to discuss Europesslowing economic growth and progress in beefing up the euro zone defensesagainst the sovereign debt crisis, but no new ground was broken.

Greeces government held an emergency cabinet meeting yesterday to plannew measures to bring its unruly budget deficit into line after a heated warning fromthe other euro zone nations over the weekend that its efforts were insufficient andmight threaten the delivery of future aid.

US President Obamawill outline today his blueprint to return the US to fiscalhealth in a speech. According to administration officials, Obama will unveil a tax re-form plan that is tilted against the wealthiest and will cut health programmes for theelderly and save money through the withdrawal of troops from Afghanistan andIraq.

Germanys Social Democrats beat Angela Merkels conservatives in a regionalvote in Berlin on Sunday, handing the chancellor her sixth election defeat this yearahead of a key euro zone vote in parliament in two weeks time.

The Bank of Englands first round of asset purchases gave the economy asignificant boost, but any future quantitative easing may not have the same im-pact, the Bank of England said in its quarterly bulletin.

Today, the eco calendar is thin with only the NAHB housing market index in theUS. The Greek finance minister will hold a teleconference with the EU/IMF andECB.

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


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Sunrise Market Commentary



Markets: Fixed Income

On Friday, US Treasuries had a very quiet low volume session that ended withmodest gains. In early US trading the market tested the downside, apparently onrumours that the Michigan consumer sentiment reading for September would besubstantially stronger than expected. However, that was not the case and equitiesfaded following a strong start, Treasuries rebounded from technical support levels toend 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 inPoland was the scene of multiple positive comments about Greece, Italy, Spain andothers. 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 decidedthat the sharp sell-off in the previous three days had gone far enough and thusBunds climbed higher in mid US session and stabilized further out. The higher vola-

tility in the German versus the US market of recent resulted now in a sharp outper-formance of German bunds (yields down between 6.6 and 11.8 bps, wings outper-forming belly).

In the intra-EMU bond universe, 10-year yield spreads versus Germany narrowedacoss countries, but the narrowing was limited for most credits with the exception ofBelgian and Greek yield spreads. The former (-15 bps) still profited from Thursdaysnews that the coalition negotiations had made progress as an important partialagreement 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 termdefault have fallen, but the declines follow steep widening in the days before.

The eurogroup and Ecofin meetings in Poland on Friday and Saturday caughtmuch attention. Political leaders and ECBs Trichet sounded upbeat on the agree-ment on the future governance in the euro area. There was an agreement on theso-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 fu-ture, there was little news about the way to solve the current debt problems. USTreasury Secretary Geithner attended the meeting and urged European policy-makers 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 lever-age of the EFSF limited fire powder via the ECB. His ideas got a cool reception. Eu-rogroups Juncker said that the consolidation of fiscal policy got priority and onlythose countries that had healthy finances could make use of the automatic stabilisa-tors. No word about real discretionary stimulus of e.g. Germany. The leveragingof the EFSF was immediately rejected by Bundesbank president Weidmann who

called monetary financing of governments by the ECB unlawful and added that theEFSF was no bank and thus not allowed to use the ECB to liquidy its bond pur-chases. Similarly on Greece, Commissioner Rehn put the country under still morepressure repeating that the country needed to fufill its fiscal targets despite lower-than-expected growth. The Greek government pledged yesterday to take the toughdecisions needed to avoid default, but announced no new austerity measures. To-day, there is a teleconference planned between the Greek finance minister and theTroika. The October 3 Eurogroup meeting could take a decision on the basis of theTroika report after which Greece would receive the funds by mid-October. Policy-makers promised that the EFSF legislation (including precautionary credit lines,secundary bond market buying and recapitulation financial institution) would be inplace by mid October. Trichet called it absolutely necessary that all promises madeon July 21 would be put into national law and implemented rapidly. Interestingly, itwas 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 decisivesteps to solve the debt crisis, the result of the meetings are disappointing. The un-

R2 138.63 -1dR1 138.01BUND 137.44 -8.2600S1 136.83

S2 136.60

DE yield -1d2 0.4710 -0.1260

0 .9 45 0 -0 .14 9010 1.7980 -0.140030 2.6790 -0.1710

US ield -1d2 0.1732 -0.0239

0 .9 20 7 -0 .02 7510 2.0566 -0.026230 3.3177 -0.0293

Technicals Dec! Bund

The LT technical picture of the Bundis bullish. The chart showed a bear-ish engulfing reversal last week andthis triggered a correction last week.However, for now this is nothingmore than a correction.

On the downside, support stands at136.83 (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 standsat 137.48 (R1, Reaction highhourly), at 138.01 (R2, 76% re-tracement), at 138.63 (R3, Weeklyenvelope) and at 138.91 (reactionhigh) and 1.3912 (Daily Boll top).

The contract is in neutral conditions.


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certainty on the approval of EFSF remains alive (no agreement on collateral issueeither), 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 willalso not help to restore market confidence.

Regarding bond markets today and further out this week, the eco calendar isempty, 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 Bundestagmight be interesting too. However, the markets will get a better opportunity to reactto the Eurogroup results. After the return of appetite last week on hopes that bolddecisions would be taken, some disappointment may reign on which German bondsmay capitalize. However, it is possible that markets wont be too pessimistic at thestart of the week. Indeed, the FOMC meeting that concludes on Wednesday mightmake markets shy taking outspoken positions and also the IMF/World bank meet-ings 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 .


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Currencies:

The euro lost slightly ground on Friday. The move should be considered as a partialreversal of the strong gains on the announcement on Thursday of joined action of themajor central bankers provide dollar liquidity. However, this issue was only a small partof the broader EMU crisis that needed to be addressed. In this respect, markets keep aclose eye on the headlines from the Ecofin meeting in Poland. EUR/USD kept a rathersideways 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 Michi-gan consumer confidence would come out strong, but the these rumours proved to beincorrect. Toward the end of the European trading session, the focus again tuned theEuropean banking crisis. So, EUR/USD returned to the levels seen earlier in Europeand 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 six-pack 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 USTreasury Secretary Geithner to leverage the EFSF or to boost the economy by morefiscal stimulus (e.g. in Germany) found little support. EU leaders reiterated that Greecemust meet the conditions that were agreed upon in order to get further support. In addi-tion, German Chancellors party faced another defeat at regional elections in Berlin thisweekend. This wont make things easier for the German Chancellor to convince hercoalition on more support for indebted EMU countries. So, the odds are for ongoinguncertainty and nervousness on the EMU debt crisis at the start of this new tradingweek. 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 datascheduled 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 enoughto ease market uncertainty on the EMU debt crisis. In this context, we assume thatsentiment 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, marketswill look out for the amount of bond purchases by the ECB. Later this week the focuswill be on the Fed meeting. It is probably too early for the Fed to take bold steps, butthe hopes might prevent a too negative positioning of the markets. Some investorsmight also hope on a sign of coordinated action from the IMF/World bank meeting atthe end of this week. However, we doubt that these will be enough to take away todeep-rooted uncertainty on the EMU debt crisis. So, we expect that the euro will con-tinue 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 fur-ther contagion on the EMU government bond markets. However, markets still saw abalance of weakness between the euro and the dollar as the news flow from the USwas also far from inspiring. The eco data indicated that the US might be at the brink ofa double dip recession, US policymakers had no comprehensive plan to address thedebt situation and S&P downgraded the US AAA-credit rating. All this weighed on thedollar. The Fed committing to extend an extremely accommodative policy at least until2013 was also no help for the US currency. So, EUR/USD hovered sideways in arange roughly between 1.4050 and 1.4550 in August. Two weeks ago, the EMU debtcrisis came again in the spotlights. EUR/USD started a correction off from the rangetop. 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 cuttingrates in the future. This removes an important support for the euro and EUR/USDdropped below the key 1.3837 level (12 (July low). Already for quite some time, we in-

dicated that a break below this level might be an indication that some kind of europanic is building. It looks that we reached that stage , even as the tension eased tem-porary 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 tempo-

R2 1.3753 -1dR1 1.370EUR/USD 1.3677 -0.0181S1 1.363S2 1.359

Technicals EUR/USD

Support comes in at 1.3636((Reaction low), at 1.3590 (Reac-tion low), at 1.3556 (Reactionlow hourly), at 1.3499 (Reactionlow), at 1.3447 (Eq. C-wave) and

at 1.3408/81 (50% Retracementof from 2010/1

sttarget triple top).

Resistance stands at 1.3706(reaction high hourly), at 1.3753(STMA), at 1.3784/94 (Gaphourly/Weekly envelope) and at1.3883 (MTMA).

The pair is in neutral territory.


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

On Friday, EUR/GBP returned the gains recorded after the announcement onThursday of coordinated central bank action to provide dollar liquidity. There were noimportant 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 asteady decline throughout the session and closed the week at 0.8741, compared to0.8782 on Thursday.

Over the weekend, the headlines/results from the Ecofin meeting in Poland failed tospark much enthusiasm on the markets. The same was true for the outcome of theRegional elections in Berlin. Overnight, the Rightmove House Prices came out mate-rially better than expected. Al this put the EUR/GBP cross rate under pressure. Thepair 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 euroside of the story will set the tone for EUR/GBP trading. Disappointment on the out-come of the EMU summit in Poland might cause a further reversal after last weeksEUR/GBP gains. Later this week, the minutes of the previous BoE meeting might beimportant 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 ascontagion also hit the Italian bond market. EUR/GBP reached a correction low at0.8643 early August. However, the key 0.8611 level stayed out of reach. The ECBbuying Italian and Spanish bonds eased the tensions on the intra-EMU bond marketsand the euro entered calmer waters. Regarding the UK side of the story, there is adecent chance that the BoE will enlarge its program of asset purchases in case UKeconomic growth remains weak. The risk of more QE in the UK capped any gains ofthe UK currency. We had a LT EUR/GBP bullish view as we expected the BoE tokeep its policy loose for a prolonged period of time while the ECB was trying to bringits policy rate to a more normal level. However, the ECB normalization process isobviously 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. Thisobliged us to change our strategy in this cross rate. Euro skepticism clearly out-weighed uncertainty on more QE. However, the price action last week showed thatthe downside risk in this cross rate is materially lower compared to the potentiallosses in EUR/USD in case the EMU debt crisis would flair up/derail. The downside

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

R2 0.8741 -1dR1 0.8724EUR/GBP 0.8706 -0.0061S1 0.868S2 0.865

Technicals EUR/GBP

Support comes in at 0.8684 (Reac-tion low), at 0.8653/38 (Reactionlows), at 0.8610/01 (Daily Boll Bot-tom/Daily uptrend line), at0.8531/25 (Last week low/daily

Starc bottom).

Resistance is seen at 0.8724/41(MTMA/Reaction highly hourly), at0.8763 (50 D MA) and at 0.8790/94(Reaction high/weekly envelope).

The pair is in neutral territory.


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

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


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News

US: consumer sentiment improves slightlyAccording to the first estimate, University of Michigan consumer confidence im-proved from 55.7 to 57.8 in September, after the collapse in August. The outcomewas slightly above the consensus. The details show that the improvement in senti-ment was only due to a rebound in the economic conditions sub-index (74.5 from68.7), while the economic outlook index weakened further (from 47.4 to 47.0). Thefurther worsening in the expectations component suggests that consumers are in-creasingly worried about the economic outlook as fears for a double dip recessiongrew recently. Also inflation expectations picked up both 1- and 5-year ahead. Forus the outcome is slightly disappointing as we were hoping for a bigger im-provement and as consumers grew increasingly worried about the economicoutlook, which might encourage them to cut spending further in the comingmonths.

EMU: trade deficit stable, imports & exports rebound

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

CalendarMonday, 19 September Consensus Previous

US16:00 NAHB Housing Market Index (SEP) 15 15UK01:01 Rightmove House Prices (MoM) (YoY) (SEP) A 0.7%/1.5% -2.1%/-0.3%EMU11:00 Construction Output MoM YoY (JUL) - - -1.8%/-11.3%Events

Japanese markets are closed in observance of Respect-for-the-Aged HolidayGreek Finance Minister holds teleconference with the IMF/EU and ECB

01:01 Bank of England Publishes Quarterly Bulletin10:00 ECB's Liikanen Speaks at Bank of Finland Quarterly Briefing

10:30 Brazil's Tombini, Bank of ECBs Costa Speak at Conference11:30 Weidmann, Regling at Open Parliamentary Hearing on Crisis15:00 ECB's Gonzalez-Paramo Speaks in Frankfurt15:30 ECB Calls for Bids in 7-Day Main Refinancing Tender15:30 ECB Announces Bond PurchasesSlovakia Bond Auction (4% Apr2020)


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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 beheld 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 theaccuracy 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.

10- ear td - 1d 2 - ear td - 1d STOCKS - 1dUS 2.06 -0.03 US 0.17 -0.02 DOW 11509.24 76.21

DE 1.80 -0.14 DE 0.47 -0.13 NASDAQ 0.00 0.00BE 3.68 -0.24 BE 1.95 -0.27 NIKKEI 8864.16 0.00UK 2.49 -0.03 UK 0.52 0.00 DAX 5573.51 65.27JP 1.01 0.00 JP 0.17 0.00 DJ euro-50 2159.28 3.66

IRS EUR USD (3M) GBP Eonia 1.11 0.163 1.524 0.641 1.308 Euribor-1 1.35 0.01 Libor-1 0.673 0.005 1.898 1.182 1.701 Euribor-3 1.54 0.00 Libor-3 0.919 0.0010 2.475 2.183 2.627 Euribor-6 1.74 0.00 Libor-6 1.201 0.00

Currencies - 1d Currencies - 1d Commodities CRB GOLD BRENTEUR/USD 1.3677 -0.0181 EUR/JPY 105.13 -1.27 329.55 1821.34 111.38USD/JPY 76.875 0.06 EUR/GBP 0.8706 -0.0061 - 1d -3.05 51.84 -1.48GBP/USD 1.5702 -0.0103 EUR/CHF 1.2064 -0.0007

AUD/USD 1.0233 -0.0103 EUR/SEK 9.163 0.05USD/CAD 0.9837 0.0002 EUR/NOK 7.7095 0.00

KBC Banking Morning Sunrise Market Commentary 09-19-2011

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