Sunrise Market Commentary - Bonds fail to break above first key resistance levels and fall lower, as US equities stage a late rebound
Yesterday, global bonds ended a volatile session moderately lower. The failed test to break above first key resistance levels is a bearish technical signal, which suggests that the upside is blocked for now and that a new test of the lows is looming. Whether this will happen will also depend on the outcome of the Fed meeting this evening. - Dollar had a rollercoaster ride that might have been influenced by FOMC speculation
Dollar recently profited from risk aversion as investors feared that the FOMC might decide to start to unwind its policy ac-commodation. This would redraw liquidity, probably the most important factor behind the stunning equity rally. We think that the FOMC will stand put and if confirmed it may end the correction in risky markets, which would be dollar negative
The Sunrise Headlines - On Tuesday, US Equities had difficulties to choose direction ahead of the FOMC meeting. Dow/S&P ended mixed after a quite volatile trading session. This morning, Asian stocks gain some ground.
- Yesterday, a senior US Treasury Department official said Finance chiefs from the G20 will start to develop a timeline for reforms to better balance the global economy at weekend meeting in Scotland, but emphasis needs to stay trained on boosting growth.
- This morning, the World Bank raised its forecasts for Chinese growth this year and projected a slightly faster pace of expansion in 2010, but added that Beijing did not need to embark on major policy tightening at this stage.
- General Motors reversed course by abandoning a long-expected sale of its Opel unit to Magna and opting to keep the European unit after a year of uncer-tainty.
- Europe's biggest bank, HSBC is cutting over 1 700 jobs in Britain, adding to thousands of cuts across the industry in the last year as pressure increases to re-duce costs.
- Yesterday, gold prices rose to an all-time high of $1084.50 on mounting concerns that efforts by governments and central banks might create side effects.
- Today, the calendar contains the final figure of euro zone services PMI, UK ser-vices PMI, the US ADP employment report and non-manufacturing ISM. The FOMC will announce rates
EUR/USD On Tuesday, EUR/USD had a rollercoaster ride that ended with modest, technical insignificant gains for the dollar. At first the dollar correction resumed as European equities hit the skids and EUR/USD fell from about 1.48 at the onset of European trading till a 1.4626 intra-day low at noon. Later on, equities found their composure and even regained some, albeit modest ground. Unsurprisingly, this pushed EUR/USD again up towards a 1.4725 close, limiting daily losses to about 50 ticks. Today, the eco calendar is attractive in the US with the ADP employment report (Oc-tober) and non-manufacturing ISM (October) scheduled for release. In the euro zone, the final figure of October services PMI is scheduled for release. However, forget these interesting data for a moment as it is the FOMC statement that will be decisive for all markets. With regard to the FOMC meeting, we don't think that the language about the stance of policy will change materially at this meeting, but if it will, markets would react sharply (equities down and so EUR/USD too). Time is simply not ripe to announce a near time change in policy orientation. Unemployment is still rising and the economy only grows one quarter, while downside risks still abounded. If the economy were to grow for let say three quarters and unemployment starts to stabilize, the policy re-quirements would surely change. This is some distance away. In the meantime, the FOMC should continue thinking about how to create more flexibility to act when it wants to. So, we stick to our view that the Fed won't do anything to rock the markets and therefore expect only marginal changes to the statement. On bal-ance, a fundamental change in the statement might seem to make more sense at the beginning of 2010 when the January meeting is followed by the semi-annual testimony of Mr. Bernanke before congress. (see our full FOMC report) If the sharp correction in equities and the more moderate decline in EUR/USD were due to a return of risk aversion and fears that the FOMC would start to redraw liquid-ity in the near future, an outcome of the FOMC meeting as outlined above (little changes), would suggest the correction in equities and in EUR/USD may be over. This does not mean that equities should revisit new highs or that EUR/USD would overshoot on the upside. Indeed, we have the impression that investors won't put on too big bets anymore going towards the year end, safeguarding the excellent invest-ment results for 2009. Tentatively, the price action of the last 24 hours suggests that the market may have decided that indeed the FOMC statement may end the correc-tion in equity markets and thus in EUR/USD. Of course, we need to see the S&P (equities) decisively move above the uptrendline at about 1062 and EUR/USD above 1.4750 (uptrendline) and even 1.4852 (MTMA). Global context: recently, the swings in risk appetite/risk aversion were the drivers on the currency markets. Improving investor sentiment towards risk is still considered a good reason to sell the US dollar. On top of that, in this low yield environment, the dollar has become (or is at least perceived to have become) the preferred currency to fund carry-trade deals. Lingering uncertainty on the huge US financing needs, some international debate on the status of the dollar and the Fed's intention to run an expansionary monetary policy for a prolonged period of time offer additional ammuni-tion for carry traders to use the dollar rather than other currencies. This has put the dollar in a vulnerable position. We stay dollar skeptical as long as we don't get a clear signal that the Fed is coming closer to reversing its very stimulating monetary policy. Last week, the ongoing building up of USD short positions in step with the stock market rally triggered a correction. However, this correction phase might have entered its final phase if our expectations for the FOMC meeting are correct. . Looking at the (technical) charts, the break of EUR/USD above the range top at 1.4438/48 and above the 1.4719 (Dec high) improved the picture, but the move con-tinued to develop in a rather gradual way. Nevertheless, the corrections, if any, were very limited, too. As we had reached our long-standing technical target of 1.5021 (2nd target double bottom of 1.3739), we turned more cautious on the ST upside potential in the pair and advised partial profit taking on standing EUR/USD long positions. We maintained a buy on dips approach with levels at 1.4750 (uptrendline) and the 1.4480 level obvious entry points. The former has been broken though and need to be recaptured to prevent a resumption of the correction towards 1.4480. Only a move above MTMA at 1.4850 (today) would be comforting for euro bulls. 
EUR/USD: MT uptrend line lost, but FOMC decisive whether correction is over for now Support comes in at 1.4698 (break-up hourly), at 1.4640 (Bollinger bot-tom/daily envelop), at 1.4626/24 (week low/weekly envelop) and at 1.4594 (2e target double top hourly). Resistance stands at 1.4753/71 (STMA/uptrendline), at 1.4793/1.4803 (38% retracement/daily envelop), at 1.4846/52 (week high/MTMA), at 1.4901 (weekly envelop) and at 1.5064 (reaction high). The pair is in oversold conditions USD/JPY On Tuesday, USD/JPY disconnected from other developments in currency markets and hovered in a tight 89.87 to 90.58 range to close virtually unchanged at 90.33 (up 12 ticks from previous close). While the dollar gained quite some ground intra-day with the trade weighted dollar reaching even a one month high, it lost more than half of its intra-day gains later on. However, the price action in USD/JPY was little im-pacted with the overall dollar trading and in fact really dull. The pair slid about 30 ticks to an intra-day low of 89.87, as European equities hit the skids in the European morning session, not a very exciting move. However, the tide turned and the yen gains evaporated when equities stabilized and later staged some recovery, after which the pair remained nearly paralyzed around the 90.30 range. Concluding, a day to forget rapidly. Overnight, trading remained basically sideways, even if some volatility was ob-served. BOJ governor Shirakawa said that the central bank will maintain its very easy monetary policy as the economic recovery is likely to remain moderate. He added that the balance of risks is more neutral as compared to the downward risks that dominated earlier this year. The change was due to better eco performance and outlook for the emerging countries. The governor admitted that downward price pressures (deflation) will remain for quite a long time due to a big output gap, but added (strangely) that it wouldn't hurt the economy. Shirakawa, who came under pressure from the government after the BOJ decided last week to end its corporate and commercial paper buying in December, also said this decision didn't mean the stance of monetary policy had changed. These comments are intrinsically yen-negative, even if they don't come as a complete surprise. It may have helped undo some intra-day yen strength. The pair is currently changing hands at unchanged lev-els of 90.34. Today, the US eco calendar is interesting with the ADP employment and the non-manufacturing ISM reports for October, but market will probably await the FOMC de-cision and statement late in the session to react. In recent day there was nervous-ness about the FOMC changing the wordings of the statement in a slightly less ac-commodative way. We think that the FOMC will opt more or less for the status quo. This would help equities overcome the correction and stimulate risk ap-petite, which is a negative for the dollar, but maybe still slightly more negative for the yen. However, while we favour the downside in the pair, the price action should remain range-bound. Global context: USD/JPY reached a reaction high in the 97.80 area early August. Despite positive global investor sentiment, the dollar could not hold on to its gains against the yen. The link between USD/JPY and global investor risk aversion/risk appetite became less tight and sometimes it even reversed. The dollar (and not the yen) was said to have become the preferred funding currency for carry trades. So, the price action in USD/JPY more or less joined the global dollar trend (decline). The long-term trend obviously remains USD/JPY negative. We turned more cautious on USD/JPY shorts on technical considerations, looking for re-entry opportunities in the 92/93 area, an area reached last week. We advocated re-installing USD/JPY short positions for return action lower in the trading range. We hold on to our bias. 
USD/JPY: downtrend intact, but no momentum Support is seen at 89.87/84 (reaction lows), at 89.46 (daily envelop), at 89.18 (week low), at 88.83 (14 Oct low), at 88.76/01 (Boll Bottom/07 Oct low). Resistance comes in at 90.48/59 (Bollinger mid-line/STMA/reaction high hourly), at 90.71/78 (week high/daily envelop), at 91.33/45 (bro-ken uptrendline/weekly MTMA) and at 92.55 (21 Sep high). The pair is in neutral territory EURGBP On Tuesday, price action in sterling trading was again volatile and showed that the aggressive re-positioning apparently isn't over yet. At first, EUR/GBP moved mod-estly higher, prolonging Monday's rally, but in early European session, euro selling, sterling buying resumed and the pair dropped fast from 0.9060 to 0.8970 where the pair took a breather. In the afternoon session a second violent sterling buying spree pushed the pair to 0.8935, after which calm returned and the pair gradually climbed to a 0.8958 close. There were no eco releases to explain the price action. The UK government communicated its plans for the bank giants RBS and Lloyds. It will cost the UK taxpayer quite a lot of money, but may help in healing the key banking sector. What this means for sterling isn't unequivocal clear. However, if large pieces of the banks will be sold to banks from outside the UK, demand for sterling would of course soar, pushing sterling up. Whatever the case, the price action didn't really change the picture. It isn't yet clear whether the correction in EUR/GBP is over or whether another sterling buying spree will lead to a third down-leg of the pair Today, the UK services PMI for October is interesting. Especially as the important survey showed already a high 55.3 result in September, defying the bleak picture the Q3 GDP report painted of the UK economy. However, traders and investors are probably wary to put big bets before the BoE and ECB meetings that take place to-morrow and the FOMC meeting that concludes after closure today. Especially the decision of the MPC on the eventual extension of the QE is key for the fortunes of sterling in a medium term perspective. Global context: Since early August, sterling sentiment deteriorated again. The BoE decision in August to raise the asset purchase program to £175B and Governor King's call for an even greater effort indicated that the Bank intended to maintain a loose policy for a prolonged period of time. This triggered a new sterling selling wave. At the September meeting, the BoE took no additional policy steps and this applies also to the October meeting. However, the Minutes of that meeting neverthe-less attracted the attention. Some observers correctly noted that in contrast to Sep-tember meeting, the more dovish MPC members didn't re-state there preference for more QE, making such an expansion of the QE unlikely, especially as some MPC members including governor King in a newspaper had become slightly more optimis-tic on the economy. We were not sure whether such an interpretation of the Minutes was correct and have to wait for Thursday's MPC meeting to know. Nevertheless, this week's drop below the key 0.8984 support is a technical warning signal, sug-gesting that the unwinding of sterling overextended short positions is not completely worked out. For now we keep a wait and see approach to see how the test of this key support area will work out. However, it is obvious that our ST sterling negative bias is under pressure. If the pair doesn't return above the 0.9000 mark soon and sustain, the correction might go quite a bit further. The 0.8845 area is the next high profile support
EUR/GBP: euro tries to fight back, but with little success until now. The MPC decision on QE may be decisive. Support comes in at 0.8951 (to-day low), at 0.8935 (week low), at 0.8912/06 (Reaction low/ 50%retracement from 0.8400) and at 0.8829 (LTMA break-up). Resistance is at 0.8995 (reaction high hourly), 0.9011 (daily en-velop), at 0.9037 (MTMA), at 0.9061/70 (week high/weekly envelop). The pair is in oversold territory News US: factory orders surprise on the upside In September, US factory orders rose by 0.9% M/M, slightly more than the consen-sus estimate of 0.8% M/M. Looking at the details, shipments of durable goods orders rose by 1.4% M/M, while non-durables increased by 0.6% M/M. Inventories fell for the thirteenth consecutive month in September. The sharp decline in inventories and improvement in orders provides further evidence that also the US manu-facturing sector is recovering, even if the report brought us little new info after the release of the timelier ISM manufacturing survey. Download entire Sunrise Market Commentary  Disclaimer: 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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