KBC Morning Sunrise Market Commentary_10!31!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, 31 October 2011

Bonds correct after the sharp Summit sell-off

Global core bonds edged higher after Thursday’s sharp sell off. End of month extension buying might have played a roletoo. This week, the eco calendar is back-loaded with a lot of important US eco data releases (ISM, payrolls), a G20meeting 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 substan-tially lower. The dollar strengthened after the move across the board. However, the BOJ acted solo, putting doubts onthe sustainability of the initial success.

News & Calendar: Belgian economy came to standstill in Q3

Sunrise Headlines

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 lessthan three months after it hit another record high against the US dollar, saying it in-tervened 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 Sta-bility Facility’s amended debt programme.

The head of Europe’s bailout fund Regling, on a tour in Asia for potential investors,said this morning he has been reassured by Japan’s top currency official that To-kyo would continue to buy its bonds.

The International Monetary Fund said yesterday that it was considering howto better help countries under economic strain because of financial marketstress but added that it was not targeting particular countries.

German retail sales rebounded less than expected in September, gaining only0.4% M/M after a 2.5% M/M plunge in August, as consumer mood remained sub-dued.

Japan’s manufacturing PMI rebounded in October due to an increase in outputat auto makers, but some companies warned that the rising yen and a slowdown inChina are hurting external demand.

Today, the eco calendar contains the first estimate of euro zone HICP inflation, theeuro zone unemployment rate and Chicago PMI in the US.

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



Sunrise Market Commentary



Markets: Fixed Income

On Friday, global core bonds recovered a part of Thursday’s sharp post EMU-Summit losses. At the start of the European session bonds reached intraday lowsbut than started their march higher, almost unabatedly. End of month extension buy-ing might have been a supportive factor. The eco calendar was uneventful and didn’tplay a role on markets. At the end of the session, the German yield curve bull steep-ened. 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, Thursday’s euphoria after the Summit also faded. Spreadsagainst Germany increased significantly for Spain, Italy and Belgium. The Spanishspread added 21 bps, the Italian 18 bps and the Belgium 13 bps. In Italy, the spreadincreased before and after the BTP-auctions (see below), even despite ECB-

interventions. The 10-year Italian nominal yield is back above the 6%-mark. Thewidening in Belgium was probably partly due to some selling ahead of today’s auc-tion. In Germany, a revision of the public accounts revealed that an accounting mis-take led to an embarrassing €55.5B overstatement of the debt burden. According tothe FM, revised figures would now show debt to GDP of 83.2% in 2010 and 81.1% in2011 (down from 84.2% and 83.7%)

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

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 10-year 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 theintended range (€5.25-8.25B) but despite the relatively low offered amount bid cov-ers were rather low. It is clear that Thursday’s EMU Summit outcome is not yetenough to bring investors back to the auctions. The Italian nominal yield also in-

creased ahead and after the BTP-auctions despite ECB intervention, which points tofurther selling pressure. Regarding Italian (and Spanish) bond auctions in general,the message is thus still the same. Demand is still domestically driven as private in-vestor demand for Italian (and Spanish) bonds remains very low. Today, the Bel-gian treasury sells €1.7-2.7B OLO’s 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 10-

T-Note future (black) & S&P future (orange) (intra-day) bonds cor-

rected after Thursday’s sell-off.

Italian 10-year nominal yield: investors are not at all convincedthat Italy is off the hook. Despite ECB intervention, Italian bondscouldn’t really profit and the yield is back above the 6%-mark.

R2 134,72 -1dR1 134,51BUND 134,3 0,0000S1 132,89S2 1,32

DE yield -1d2 0,5980 -0,07005 1,2930 -0,07201 2,1660 -0,06103 2,9140 -0,0610

US yield -1d2 0 2931 -0 01575 1 0966 -0 072810 2,2896 -0,07043 3,3475 -0,0697






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, Belgianbonds 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 Belgium’s strong underlying mac-roeconomic fundamentals. An agreement between negotiation parties, including ona multi-year austerity package, to form a government might give Belgian bonds aboost.

Regarding bond markets this week, the calendar is back loaded. Today onlyeuro zone CPI and US Chicago PMI are scheduled for release. Especially theCPI release will be interesting but probably easily digestible for markets. To-morrow, a lot of European markets are closed (including Germany) whichmakes us believe that volumes will be even lower than on other Monday’s andcan cause sharp moves. The BOJ interventions are causing some renewed

risk aversion from which the Bund profits at the start of trading, at the ex-pense of non-core bonds. .

Further down the week the FOMC and ECB meetings will be of the essence. Inthe 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 directedto MBS-paper. With regard to Thursday’s ECB meeting, we don’t expect newpresident Draghi to cut rates at his first appearance but however leave thedoor open to a cut later this year. For a more detailed analysis, we’d like to re-fer to our flash report which will appear on www.kbcdealingroom.com later to-day).

The eco calendar also heats up later this week with the US manufacturing and

non-manufacturing ISM’s, the ADP employment change and the payrollsscheduled for release. The outcome of these metrics will give us a better viewon how big the recession threat is.

Finally, Thursday and Friday the G20 meeting, with the focus on EMU, isscheduled. A concrete outcome is not expected, apart from statements aboutthe actions EMU leaders took at last week’s 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 somereturn action occurs.

Dec Note Future: failed test key support (128.11)

Technicals Dec Bund

The LT picture has lost its bullishcharacter after a triple top configura-tion was confirmed Targets of thefigure are in the vicinity of 131. TheEMU Summit caused a sell-off thatthreatens now the key 132.94 level.A sustained break of the latter wouldsuggest bonds have more ground tocede.

On the downside, support stands at132.89 (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 standsat 134.51/65 (R1, STMA/MTMA), at134.72 (R2, breakdown daily), at135.01 (R3, gap hourly), at 135.65(R3, Bollinger midline),

The contract is in near oversoldconditions.






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

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 re-lief rally was a bit exhausted and some players booked profits or squared positionsahead of month end. This was the case for the equity markets and for EUR/USD. Thepair closed the session and week at 1.4148, 40 ticks down on Thursday’s close, but upfrom previous Friday’s close of 1.3897.

The EUR/USD cross rate traded in the 1.4175 area at the start trading in Europe andwhen an initial attempt to break above 1.42 failed, the pair slid in a narrow sidewaysrange between 1.4190 and 1.4135. European equities tried to extend the gains fromThursday, but also here some, albeit insignificant, profit taking ultimately occurred. Theonly factor of minor importance was an Italian bond auction, which went difficult, butwith limited impact on EUR/USD trading. The US eco data were mixed, but didn’t affect

trading.

This week is the first calendar week of a new month and thus rich in economic data. Inaddition, the Fed and the ECB will hold their policy meetings. Today, the European in-flation data will be published. Inflation is not super-important for currency trading, butin 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 ECBwon’t cut interest rates anytime soon), but we think that even in that case an easing of ECB policy is on the cards. However, we don’t expect it to occur at the November meeting, even if inflation is in line with expectations for a small decline (see our flashthat 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 willalso only be of intraday significance, at best.

Regarding the Fed meeting, the focus will be on the communication policy. Will the Fedannounce 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 atvery low levels. Or will it make changes depended on reaching some targets, like thesuggestion of Chicago Fed president Evans. To keep rates at rock bottom levels aslong 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 tosupport the housing mortgage market. Any indications that the Fed is preparing moreQE would put additional pressure on the dollar. We think that it is too early for the Fedto take new steps, given that it only recently put in place its operation twist and the bet-ter 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 dol-

lar will continue to fight an uphill battle in the run-up to the Fed meeting.

EUR/USD: break higher, but Japanese interventions give the dollar some overallstrength.

R2 1,4055 -1dR1 1 4017EUR/USD 1 3998 -0 0192S1 1,3976S2 1,3915

Technicals EUR/USD

Support comes in 1.3976/75(break-up daily/today low), at1.3915 (break-up hourly), and at1.3898 (MTMA).

Resistance stands at1.4254(62% retracement off year high), at 1.4359 (Break-down daily August), at 1.4516(78% retracement).

The pair is in overbought terri-tory.






Overnight, the Japanese authorities stepped into the market and sold yen after ithit another record high against the dollar (see Japanese part). The dollar rallyagainst 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 openinglevels at 1.4150.

Looking at the technical picture, the pair is now again in the ‘old’ sideways trading pat-tern 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 maytemporary boost the dollar against the euro, but it shouldn’t be sustainable gains and itmay 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 onThursday 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 inthe past weeks. Overnight, the inevitable happened. When USD/JPY slid belowthe lows, the BOJ on demand of the Minister of Finance couldn’t sit idle any-more and intervened pushing the pair up to 79. Finance Minister Azumi said the in-tervention was a solo act that would continue until it was satisfied with the results. Noamounts were communicated, but it seems that buying occurred in three waves. Somemarket participants guess the BOJ spend about 5.5 T yen. Azumi added that while itwas a solo act, he was in frequent contact with other countries. PM Noda added thatexcessive FX moves have a destabilising impact and that the intervention was to pre-vent downward eco risks from realizing. Markets are contemplating whether Japanwants to set a floor on its currency, like the Swiss did some time ago. On August 4, theBOJ intervened too, pushing the USD/JPY pair up briefly to 80.25 from 77.10. It looksas 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 sus-tained. Key for the pair is the situation in the US. More QE would inevitably weakenthe 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 beinteresting whether the BOJ will do some follow up buying when trading starts inEurope 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 BOJmade 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 don’t see a trigger to change the current frameworkfor USD/JPY trading. In September/early October, the dollar was in better shape evenas US monetary policy suggests ongoing global dollar weakness. However, thisbroader dollar rebound was hardly visible in the USD/JPY cross rate. Any upticks soonmet selling interest.

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

R2 -1dR1USD/JPY 79 3,1450S1S2

Technicals USD/JPY

Support comes in at 78.01 (bro-ken Daily Boll top), at 76.72 (bro-ken Bollinger mid-line) and at76.60/67/68(STMA/MTMA/LTMA).

Resistance is seen at 79.53 (Post

intervention high), at 80.24 (Aug 4high) and at 81.48 (8 July high).

.






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 follow-through gains on Thursday’s 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. Thepair dropped below the 0.88 mark in afternoon trading, but the jury is still out towhich side of the 0.88 barrier the EUR/GBP balance will tilt. The pair closed the ses-sion at compared to 0.8814 on Thursday evening. Overnight, the BOJ interventionshad little impact on the EUR/GBP cross.

Today, the UK money supply and lending data will be published. Usually they are nobig issue for sterling trading. So, the focus for EUR/GBP traders will go out to thetechnical picture.

Global picture. In August/September the EMU debt crisis came again to theforefront. In addition, at the September meeting, the ECB put the normalizationprocess 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/GBPremained much more contained compared to the potential losses in EUR/USD incase 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. Thebottom was under heavy pressure early October but the test was rejected. The Oc-tober BoE decision to raise the amount of asset purchases pushed EUR/GBP againhigher in the established trading range. A broader rebound of the euro in the run-upto the EU summit triggered further gains in EUR/GBP too. The pair tested the key0.8795 neckline early last week, but the test was rejected. The pair tested severaltimes the 0.8670/75 area over the previous days, but a break didn’t succeed. Thistriggered a rebound into the 0.87 area and the pair is now extensively testing therange top. Sustained trading above this level would improve the short-term picture inthis cross rate, too. .

EUR/GBP: test key 0.88 area failed?

R2 0,8886 -1dR1 0,8795

EUR/GBP 0,8762 -0,0054S1 0,867S2 0,8635

Technicals EUR/GBP

Support comes in at 0.8742/39(STMA/MTMA), at 0.8712/18(LTMA/Bollinger mid-line), at0.8742/39 (STMA/MTMA) and at0.8670 (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), at0.8886 (Aug. high) and at 0.8953(76% retracement). .

The pair is in overbought territory.






News

US: Michigan consumer confidence upwardly revisedThe final figure of October University of Michigan consumer confidence showed a significant upward revision compared to the first reading. Michigan con-sumer sentiment was upwardly revised from 57.5 to 60.9, compared with a readingof 59.4 in September, while the consensus was looking for only a slight upward ad-

justment. The details show an upward revision in both the economic conditions (75.1from 73.8) and economic outlook (51.8 from 47.0) sub-indices. Both Michigan andConference Board’s consumer confidence remain however at depressed levels. Thisupward revision in the Michigan’s reading might be an indication that also theConference Board’s recent dismal reading will improve somewhat in the com-ing months.

EMU: Belgian economy came to standstill in Q3After a decent performance in the second quarter, Belgian economic growth cameto a standstill in the three months to September. Also second quarter growth wasslightly downwardly revised from 0.5% Q/Q to 0.4% Q/Q. This outcome providesfurther evidence that the euro zone economy is struggling to stay out of reces-sion. German GDP might be stronger in the third quarter, after an extremelypoor second quarter, but the outlook for the fourth quarter is bleak and theeuro zone economy will likely contract in the last three months of the year.






Calendar

Monday, 31 October Consensus PreviousUS14:45 Chicago Purchasing Manager (OCT) 59.0 60.4Canada13:30 Industrial Product Price MoM (SEP) 0.1% 0.5%13:30 Gross Domestic Product MoM / YoY (AUG) 0.2%/- - 0.3%/2.3%Japan00:15 Markit/JMMA Manufacturing PMI (OCT) A 50.6 49.306:00 Construction Orders (YoY) (SEP) A -9.3% 9.3%06:00 Annualized Housing Starts (SEP) A 0.745M 0.934M06:00 Housing Starts (YoY) (SEP) A -10.8% 14.0%UK01:01 Hometrack Housing Survey (MoM) (YoY) (OCT) A-0.2%/-2.8% -0.1%/-3.5%10:30 Net Consumer Credit (SEP) 0.4B 0.5B10:30 Net Lending Sec. on Dwellings (SEP) 0.5B 0.6B10:30 Mortgage Approvals (SEP) 50.0K 52.4K10:30 M4 Money Supply (MoM) (YoY) (SEP) - -/- - -0.2%/-0.6%EMU11:00 CPI Estimate (YoY) (OCT) 2.8% 3.0%11:00 Unemployment Rate (SEP) 10.0% 10.0%Germany08:00 Retail Sales (MoM) (YoY) (SEP) A0.4%/0.3% -2.9%/2.2%France08:45 Producer Prices (MoM) (YoY) (SEP) - -/- - 0.0%/6.3%Italy10:00 Unemployment Rate (SA) (SEP P) - - 7.9%11:00 CPI - EU Harmonized (MoM) (YoY) (OCT P) - -/3.4% 2.0%/3.6%Belgium

Unemployment Rate (s.a) (SEP) - - 6.8%Spain09:00 Total Housing Permits (MoM) / (YoY) - -/- - -11.9%/-12.7%

Norway10:00 Credit Indicator Growth (YoY) (SEP) - - 6.5%10:00 Retail sales - vol sa (MoM) (YoY) (SEP) 0.2%/- - 1.3%/7.6%Sweden09:30 Wages - Non-Manual Workers YoY (AUG) - - 2.1%Switzerland09:30 PMI Manufacturing (OCT) 47.7 48.2Events07:30 Swiss National Bank Publishes Quarterly Results11:15 ECB Announces Allotment in 8-Day Main Refinancing Tender 11:30 Belgium Auction (€1.7-2.7B, OLO 54 4% Mar2014 & OLO 63 3.5% Jun2017 &

OLO 61 4.25% Sep2021)

10- ear td - 1d 2 - ear td - 1d STOCKS - 1dUS 2,29 -0,07 US 0,29 -0,02 DOW 12231,03 22,55DE 2,17 -0,06 DE 0,60 -0,07 NASDAQ 0,00 0,00BE 4,33 0,07 BE 2,43 0,13 NIKKEI 8988,39 -62,08UK 2,64 0,00 UK 0,53 -0,06 DAX 6346,19 8,35JP 1,05 0,00 JP 0,22 0,00 DJ euro-50 2462,36 -14,56

IRS EUR USD 3M GBP Eonia 0,92 0,003y 1,677 0,766 1,505 Euribor-1 1,37 0,00 Libor-1 0,706 0,005 2,050 1,370 1,934 Euribor-3 1,59 0,00 Libor-3 0,987 0,0010 2,677 2,429 2,825 Euribor-6 1,79 0,00 Libor-6 1,268 0,00

Currencies - 1d Currencies - 1d Commodities CRB GOLD BRENTEUR/USD 1,3998 -0,0192 EUR/JPY 110,6 2,98 323,07 1707,2 109,25

USD/JPY 79 3,15 EUR/GBP 0,8762 -0,0054 - 1d -1,20 -34,00 -2,50GBP/USD 1,5975 -0,0116 EUR/CHF 1,2204 -0,0017

AUD/USD 1,0546 -0,0131 EUR/SEK 9,0297 0,03USD/CAD 0,9999 0,0085 EUR/NOK 7,6800 0,01






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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 arecommendation 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.

KBC Morning Sunrise Market Commentary_10!31!2011

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Transcript of KBC Morning Sunrise Market Commentary_10!31!2011