• Home ::
• Fundamental ::
• Analysis Reports ::
• Sunrise Market Commentary

Sunrise Market Commentary

The ECB is likely to start its purchases of covered bonds within weeks

Tue, May 26 2009, 07:30 GMT
by KBC Market Research Desk

KBC Bank  |  View company's profile

Vote:

ce497901-8b51-4154-a07d-ef0c152458c7

5

0

• Send
• Print
• Add To
• Rss

• European stocks rose slightly on Monday despite a weaker than expected German IFO indicator. This morning, Asian shares trade mixed.

• Japan provided another $3 billion lifeline to small Japanese firms operating overseas to help them raise cash in US dollars, even as credit market conditions show signs of improvement.

• The ECB is likely to start its purchases of covered bonds within weeks after the June meeting and hopes to exit non-conventional policies as soon as possible, board member Gonzales-Paramo said on Monday.

• The final figure of German first quarter GDP came out in line with the previous forecast at -3.8% Q/Q driven by a 9.7% decline in exports and a 7.9% slump in capital investment.

•  Rio Tinto agreed a 33% cut in contract fine iron ore prices with Nippon Steel Corp for the current shipping year, setting a benchmark for steelmaking costs after prolonged negotiations.

• Crude oil ($60.87) stayed broadly unchanged on expectations that OPEC will not adjust production at its meeting on Thursday.

Markets

The closure of US and UK markets yesterday led to very thin trading in markets that remained open. In the Bund, only 166 000 contracts were traded and also volumes in the EuroStoxx were less than halve of normal days. Our traders reported similar thin trading in the Forex markets. The only eco data release worth mentioning was the May German IFO business confidence report. It showed some modest improvement for the second month in a row, but it fell shy of expectations and was disappointing. It might indicate that Germany and by extension EMU is lagging the signs of recovery apparent in Asia and probably in the US too. So while the IFO report had a slight negative effect on the euro and some upticks in bonds, these moves weren’t sustained and couldn’t change the dominant sentiment which is bearish for bonds and bullish for EUR/USD.

For the sake of completeness, EUR/USD closed at 1.4015 versus 1.3999 on Friday, while USD/JPY was nearly unchanged at 94.83 and EUR/GBP strengthened marginally to 0.88094 from 0.87875 previously. The Bund closed at 119.63, officially down 63 ticks from the previous close, but most of these reported losses were in fact registered in Friday’s after-closure trading. European equities initially fell lower, but soon found a bottom and gradually erased these losses to end little changed too.

Today, the euro zone calendar heats up as it contains the EMU industrial new orders (March), German Q1 GDP (revision), April French consumer spending and May Belgian business confidence (May) amongst some other less influential reports. In January and February, the decline in euro zone industrial new orders eased somewhat and for March, the consensus is looking for the first monthly increase since July last year (0.8% M/M). While the report is outdated and contains already reported national data, a positive outcome might have some (modest psychological) impact confirming that also in EMU the economy is improving. Belgian business confidence is expected to have improved from –29.4 to –27.1 in May, a better outcome is not excluded after the upward surprises in the PMI’s., but yesterday’s disappointing IFO report seamed renewed uncertainty about our balance of risk surrounding consensus.

In the US, the calendar is well-filled after the long weekend with the S&P house prices (March), May consumer confidence and the Richmond Fed (May). Last month, Conference Board consumer confidence showed an impressive rebound, rising from 26.9 to 39.2. For this month, another, but more modest increase is expected (to 42.6). Also the Richmond Fed, which showed a significant rebound since the start of this year, is forecasted to extend its upward trend (-6 from –9). We don’t have a clear view on the risks as previous released regional confidence indicators showed a mixed picture with the NY Fed surprising on the upside of expectations, while the Philly Fed disappointed. The decline in S&P house prices is forecasted to have slowed a bit further in March (-18.40% Y/Y from –18.63% Y/Y).

Bond markets will also keep a close eye on government supply. In the US, the Treasury will auction $40B of 2-year Notes today, followed in the next days by $35B 5-year and $26B 7-year Notes, a total package of $101B, unchanged from last month, Supply is clearly weighing on bond markets with 10-year Treasury yields (3.44%) at their highest level in about 6 months. In EMU, the Netherlands will auction bonds too for a more modest amount, but for the whole week also here supply is an issue with €21B of bond sales and no redemptions or coupon payments. Also in the EMU bond markets, 10-year yields (3.60% for German 10-year) are at their highest level in 6 months. The German 10-year yield is close to the 3.67%, a major (breakdown) level that should at least give bonds a breather. From a technical point of view, a sustained break of that level might lead to selling panic and talk of a bond market crash. In the US, the technical picture of the 10-year yield has already deteriorated further, as the yield is above the similar breakdown level of 3.28% and above a downtrendline from the June 2007 high.

In the FX markets, the dominant theme is dollar weakness that reflected in technical dollar bearish charts. We elaborated yesterday on the dollar weakness. Today’s eco data may be intrinsically dollar positive, as they might confirm the early signs of recovery. The problem is that the market looks different to stronger US data. They are seen as a key factor behind the return of risk appetite and therefore a reason to sell the dollar across the board. That relationship may change, but we didn’t see signs of such a change yet. After talk last week that the US may at some point lose its AAA rating, market participants will closely look how the Treasury auctions fare. It will be a barometer about the appetite of foreigners for US (safe) assets. Signs that those foreigners trim their appetite for Treasuries would be additionally dollar negative. Looking at EUR/USD, the outlook is euro positive as long as the 1.3739 level holds (previous major resistance). USD/JPY hovers around without momentum and this may continue today. EUR/GBP is under some downward pressure at the start of trading, as the single currency couldn’t really profit last week from the S&P decision to put the UK AAA rating on negative outlook. It will be interesting to see whether the pair stages a frontal attack on the very key 0.877 to 0.867 area.

• Download Full Sunrise Market Commentary

Published on  Tue, May 26 2009, 08:14 GMT

Vote:

ce497901-8b51-4154-a07d-ef0c152458c7

5

0

• Send
• Print
• Add To
• Rss