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Sunrise Market Commentary

In the US, conference board consumer confidence jumped from a revised 40.8 to 54.9 in May

Wed, May 27 2009, 06:58 GMT
by KBC Market Research Desk

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• On Tuesday, US Equities rallied after US consumer confidence showed its biggest jump in six years. Dow/S&P ended 2.37% / 2.63% higher. This morning, Asian shares hit their highest level in seven months.

• The Japanese trade balance showed modest signs of recovery as exports rose for the second consecutive month in April; providing more evidence that the worst in trade may be over.

• In the US, conference board consumer confidence jumped from a revised 40.8 to 54.9 in May, the highest level in eight months, which might reflect some easing of the severe strains in the labour market.

• In March, S&P Case Shiller house prices fell by 2.2% M/M, indicating that the fall in home prices remains steep.

• Today, the German government is due to decide which bidder or bidders it prefers as a partner of the Opel unit of struggling US carmaker General Motors.

• Yesterday morning, crude oil dropped below $60 a barrel, but ended the session significantly higher ($62.54) boosted by the rebound in US consumer confidence.

Markets

On Tuesday, trading on almost all markets showed two different faces. The US consumer confidence report was the tipping point for trading. Before the release, investors were rather cautious. The tension surrounding North Korea was even a good excuse to lock in profits in some riskier asset classes. Global stock markets were waiting for guidance from the US as US and UK markets were to resume trading after the holiday on Monday.

US markets were perfectly able to take up this role. US consumer confidence jumped higher at a pace well beyond market expectations. At the same time, also the Richmond Fed activity index came out stronger than expected. Those two data series erased investor’s disappointment after weaker than expected US housing data published earlier in the sessions. Stocks and other cyclically sensitive assets (like commodities) jumped higher upon those releases as investors saw those data series as another potential indication that the trough in this economic cycle might be behind us. The S&P recorded a gain of 2.63%. So, the 877 previous high now perfectly plays its role as first support area. The reaction on other markets was rather straight forward.

Bonds already faced quite some headwinds recently and this pattern didn’t change after yesterday’s US data. US 10-year yields cleared the psychological barrier of 3.50%. German 10-year yields closed the session at 3.62%, the highest level since mid-November of last year. Over the previous days, government bond yields were higher on credit concerns. Yesterday, bonds were pressured by the hope on an economic recovery. Whatever the reason, the least one can say that bonds continue to fight an uphill battle. This analysis is also confirmed by the technical picture as yields for maturities longer than five years on both side of the Atlantic have now confirmed the break above the key levels that were broken recently. Today, markets will take a very close look at the 5-year bond auction in the US (35 B).

On the currency markets, the euro lost some ground early in the session, but the return of risk appetite after the US consumer confidence release helped the single currency to recoup the earlier losses. Nevertheless, despite yesterday’s intra-day rebound, a sustained break of the 1.40 mark doesn’t look that easy for now. The initial reaction in USD/JPY was much more muted. The pair balanced between global dollar weakness and some yen selling pressure due to improved risk sentiment. This morning, the latter prevailed and the pair regained the 95.00 mark, confirming the view that a break below the 93.85/52 range bottom is not that evident. Yesterday’s data had no big impact on sterling trading. The UK currency remains well bid, supported by a global positive investor sentiment. However, for now the key EUR/GBP 0.8637 level is still not really challenged.

Regarding the eco data, today, the calendar contains the German CPI data (May), the French business confidence indicator (May) and US existing home sales (April). In May, German CPI inflation is forecasted to decline further and come out close to zero (0.2% Y/Y). The monthly figure might however show a slight uptick due to the upward trend in oil prices. French business confidence is forecasted to show the second consecutive improvement (73 from 71) in May. In the US, existing home sales are expected to have risen by 2.0% M/M in April after falling by 3.0% M/M in the previous month. The improvement is expected to come from low rates and home prices and government stimulus plans.

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Published on  Wed, May 27 2009, 07:07 GMT

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