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Sunrise Market Commentary

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BoJ warns that global slowdown hurts Japanese exports

Fri, Aug 22 2008, 07:26 GMT
by KBC Market Research Desk

KBC Bank

• US equities end mixed on jumping commodity prices, but Asian stocks decline this morning.

• The US dollar falls the most against the euro in one month ahead of Bernanke’s speech today.

• Merrill Lynch, Goldman Sachs and Deutsche Bank agreed to buy back $14.5 billion of auction-rate agreements and pay $162 million in fines to resolve investigations into whether they misled people who bought these instruments.

• Oil climbs above $120 a barrel and gold prices jump on mounting geopolitical tensions between the US and Russia.

• Today euro zone industrial orders, Belgian business confidence and UK Q2 GDP on the calendar, Bernanke speaks on financial stability.

Markets

Yesterday, commodities jumped higher on concerns that the tensions between Russia and the West could disrupt energy supply. At the same time, the US Energy Information Administration repeated its forecast that oil prices would trade in a 120-130 USD/barrel range for the rest of the year, as it warned that Saudi Arabia could cut back its recent rise in output to contain any further weakness in crude prices. Oil prices surged more than 5 USD higher to above the 120 USD/barrel level and the overall CRB commodity index soared more than 3% higher.

The sharp rebound on the commodity markets left its traces on the FX and FI markets, as both the dollar and bond markets retreated from their recent highs. The euro rose to levels close to 1.49, while USD/JPY fell below 109. Sterling gained ground too fuelled by stronger than expected UK retail sales. The retreat of the dollar didn’t threaten yet the recent improvement in the technical outlook for the Greenback, but signals that the recent recovery of the dollar may be over for now. On the bond markets, bonds were hit by some profit-taking following the recent rally higher. As such, the jury is still out whether US Treasuries will be able to break above the July highs in a sustainable manner. Both in the US and the euro zone, there was a bear flattening of the yield curve with yields up between 5.5 and 1.5 bps in the US and between 8.5 and 4.5 bps in the euro zone. Easing tensions surrounding Fannie Mae and Freddie Mac may have contributed to a reversal in recent safe haven flows which have favoured the short end of the curve, while the spike higher in the commodity markets reduces the chances of an early easing in the euro zone and may bring a rate hike closer in the US.

Today, the yearly Fed summit in Jackson Hole will start with a speech of Bernanke on financial stability, while in the euro zone the Belgian business confidence indicator will be closely watched.

Oil jumps higher, approaching key resistance levels, which if broken would improve the technical outlook and bring the highs again in the picture.

The dollar (trade-weighted) retreats from the recent highs. Is the recovery over for now?

No clear break yet above the July highs in the US T-Note future.

Jury is still out whether yields (2-year) will fall further. This afternoon, Bernanke will speak.

European bonds hit by some profit-taking. Is the rally over for now?

German 2-year yields bounce back above the 4% level.

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Published on  Fri, Aug 22 2008, 07:33 GMT