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Sunrise Market Commentary

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Georgia and Russia agree on peace plan

Wed, Aug 13 2008, 06:30 GMT
by KBC Market Research Desk

KBC Bank

• Bonds rally higher, as equities fall on renewed credit concerns

• Dollar rebound stalls against the euro, although commodities lose further ground

• Sterling weakens further on rising economic concerns following higher than expected UK inflation data

• Japanese economy contracts in Q2 highlighting the global economic slowdown

• Today’s Bank of England’s inflation report and US retail sales eagerly awaited

• Norges central bank set to leave rates unchanged at 5.75%

Markets

Yesterday, the rally of the dollar stalled against the euro, but continued against sterling, as Cable fell below the psychological important 1.90 level. The higher than expected inflation data, which showed UK inflation rising to 4.4% Y/Y in July, failed to support sterling, but instead added to the economic woes in the UK. On the Gilt market, bonds rapidly recouped their early losses and closed the session significantly higher. As such, UK yields fell between 8.8 bps in 2-year yields and 4.9 bps in 30- year yields. Yesterday’s remarkable market reaction illustrates the shift in market sentiment over the past couple of weeks in which growth fears have overtaken inflation fears as the dominant trading theme. Whether this will persist will now heavily depend on the central bankers. In this context, today’s inflation report from the Bank of England will be very important.

In the euro zone, ECB’s Weber already warned yesterday that fighting inflation remains the ECB’s ‘highest priority’ and added that the inflation outlook remains poor in spite of the recent drop in oil and energy prices. His comments were however ignored by the market, as the European bond market continued its rally higher supported by the weakness in the equity markets. Renewed credit concerns related to new write-downs at JPMorgan Chase and weak Q2 earnings at UBS sent equities lower on the day. Also in Asia, equities are under downward pressure this morning. The contraction of the Japanese economy in the second quarter provides the latest piece of evidence that the slowdown in the US is spreading towards the global economy.

Today, the calendar heats up in the US with the publication of the July retail sales. These are expected to show their first monthly decline in five months, as the impact of the tax rebates starts to wane.

Dollar rebound stalls against the euro, …

… but continues against sterling, as high inflation data add to economic woes in the UK.

Decline in equity markets (S&P)…

… sends German 2-year yields lower despite hawkish comments of ECB’s Weber.

Oil …

… and gold extend decline.

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Published on  Wed, Aug 13 2008, 06:47 GMT