The S&P broke above the first resistance level at 1100

Sunrise Headlines

• On Monday, US Equities rose 1% as investors welcomed a better than expected new home sales report. The S&P broke above the first resistance level at 1100. This morning, most Asian shares trade slightly lower.

• Philadelphia Fed President Plosser said yesterday that the US economy does not need further monetary stimulus from the US central bank. He would like to wait for the “noise” that has affected recent data to pass before making further judgement on the likely path of economic growth.

• The ECB said it had bought 176 million euros worth of bonds in the week ending July 23, just over half the amount of the previous week in a further sign the programme might be phased out soon.

• The Basel Committee will scale back many of its proposals to beef up bank capital and liquidity rules, its oversight body said on Monday, signalling concessions in the face of lobbying by banks and governments.

• The Bank of Israel raised its benchmark interest rate by a quarter point in a surprise move aimed at countering the inflation risk of its surging housing market. This morning, the Reserve Bank of India raised its key rate more than expected battling to contain a surge in inflation.

• Hungary will start phasing in a flat rate tax system from January 2011, Deputy Prime Minister Navracsics said, which may help reduce tax evasion and boost revenues as the country tries to cut its budget deficit.

• Confidence among big South Korean firms fell to a one-year low for August, reflecting the uncertain economic outlook, although the majority was still optimistic, a survey showed this morning.

• Crude oil stabilized near $79 a barrel as forecasts indicated a trend of falling crude inventories and rising refined product stockpiles.

• Today, the eco calendar contains the Richmond Fed manufacturing index, US conference board’s consumer confidence and the euro zone M3 money supply and credit growth data.

Markets

Yesterday, the eco calendar was thin as it only contained the US new home sales. In June, new home rebounded by an impressive 23.6% M/M, but the (two) previous figures were significantly downwardly revised. New home sales rose to a total number of 330 000, still above the expected 310 000, which might indicate that the slump after the end of the government’s tax credit didn’t last that long. Nevertheless, the better than expected outcome pushed US equities slightly higher after a flat open.

Regarding markets, in a holiday-thinned session devoid of many eco releases, attention went to the stress tests that were published after European market closure on Friday. They got mixed reception. The European equity market barely moved for most of the session, until the US New Home sales pushed US (and European) equities up. However, in other markets, we did see some cautious positive reaction. In credit markets, the ITRAXX crossover (and the financials) fell substantially. In the European bond market, the reaction was hesitant at first, but gradually the frog disappeared and at the end of the day, one may conclude (until now) that the stress tests have diminished risk aversion. However, it is early days and the thinness of markets demands cautiousness in interpreting the moves. The German bond curve was clearly under pressure, with the short end taking the brunt. 2-year yields ended 8.2 bps higher, while the 10-year yield added 5.5 bps. This compares to a nearly flat outcome for US Treasuries. Also the rally in the peripheral markets showed that risk appetite post stress tests increased. Especially Spain stood out again and is reaping the benefits of its consequent policy of transparency on the banking sector. So, peripheral spreads versus Germany narrowed substantially. Spain’s 10-year yield spread plunged an impressive 16 basis points to 148 basis points. However, while last week, the yield spreads of other peripherals like Portugal, Ireland and Greece stabilized at very high levels, there was now also a substantial spread narrowing in these weaker credits.

The ratio for the underperformance of the short end of the German curve is that successful stress tests mean that (positive) risks are for a normalization of money market operations and thus less need for the ECB to support liquidity or at least the risk increased that liquidity may be absorbed earlier than expected until recently. Similarly, the intra-EMU yield spreads versus Germany narrowed, even quite spectacular in the case of Spain. Technically, the Bund did test the first key support level at 128.60, but couldn’t break below. We define the 128.60/12 as the key area that need to be broken before the technical picture changes in a longer-term perspective.

US Treasuries ended the session little changed after some intra-day volatility. Treasuries were initially under pressure, as equities moved surprisingly higher on the US New Home sales that were better than expected, but only following a steep downward revision of the previous figure. Later on, Treasuries rebounded, while equities stabilized. The technicals might have played a role, as an important uptrendline (Sep T-Note future, see graph) was tested, but the market resisted its break. We didn’t see many other elements than the thinness of flows to explain the rather strange intra-day price action.

In other news, the ECB reported it had just bought €176M of government bonds last week, about halve of the amount bought in the previous week and suggesting the Securities Markets Program might soon been phased out, as president Trichet suggested in the June ECB press conference. While we have been critical on the ECB program as insufficiently bold, it looks as if the markets have stabilized and (at least for now) doesn’t need anymore the ECB support, with some help of the stress tests. The ECB will hold its sterilization auction today.

Today, the eco calendar contains the euro zone M3 money supply and credit growth data, US Conference Board’s consumer confidence and the Richmond Fed manufacturing index. Supply is heavy as Holland, Italy and the US will tap the bond market, while Spain issues T-Bills.

In the euro zone, the decline in M3 money supply is expected to have slowed from - 0.2% Y/Y to -0.1% Y/Y. Last month, the euro zone lending data showed an increase in lending to non-financials, which might be a first indicator that lending to the private sector might be starting to pick up. It will be interesting to see whether lending to nonfinancials increases further in June, as it is an important factor for the recovery to gain strength. In the US, Conference Board’s consumer confidence is forecasted to show a slight decline in July (51.0 from 52.9) after a sharp drop in June. We have no reasons to distance ourselves from the consensus. In July, the Richmond Fed manufacturing index is forecasted to drop for the third consecutive month. The consensus is looking for a decline from 23 to 11 in July, which is in line with the significant deterioration in the earlier released Philly and NY Fed indices.

The Belgian Debt Agency successfully sold €2.3B of paper, consisting of its 2.75% Mar 2016 OLO (€1B) and its 3.75% Sep 2020 OLO (€1.3B), near the middle of its target range. Demand was solid and led to a bid cover of 1.97 (2.06 previously) and 1.85 (1.75 prev.). The average yield amounted to 2.585% and 3.328% respectively. Favourable cash flows and a pre cheapening underpinned the auctions. The Agency has now already filled the bulk of its 2010 issuance plan, which bodes well for Belgian debt. Today, the Dutch Debt Agency will tap the 3.25% July 2015 DSL and the 5.5% Jan 2028 DSL for an amount of maximum €2B. Italy re-opens its Apr 2012 CTZ for €2B. We don’t expect particular difficulties for the auctions. In the US, the Treasury will hold its $38B 2-year Note auction. The size is $2B smaller than in June which is a positive, but the yield is at very low levels. Nevertheless, while some auctions haven’t gone exceptionally of late, they passed usually quite easily and this might be the case again today: a good, but no exceptional auction.

Regarding bond market trading today, the EMU M3 money supply figures are interesting, but most often cannot move the markets. However, stronger loan growth to firms would be a negative for bonds. European supply shouldn’t play a major role. So, before US markets open, it might still be the stress tests and the technicals that drive the action. The stress tests and the return of risk appetite is a negative for German bonds, but we suspect European equities to open little changed and ignore, as Asian equities did, yesterday’s good (but suspicious) gains on Wall Street. The Bund is also testing the key 127.60 level, which as the chart show, is the neckline of a bearish triple top formation. A break would be relevant, but the 127.12 level, the June 12 low, is still in the way of a distinct deterioration of the bullish picture. However, a break of 127.60 would already make us cautious, as it could incite longs to book some profits on the previous steep rally. It looks maybe too early for a sustained break though, but a profit-taking-on-upticks looks certainly appropriate as risk aversion may wane further. In the afternoon, the US eco data and later on the 2-year Note auction are focal points. Following a long string of weaker than expected data and given the breath-taking bond rally, Treasuries may be more vulnerable for stronger-than-expected than for weaker-than-expected outcomes for business and consumer confidence. Coming ahead of the auction, downside risks for Treasuries seem to prevail. Please take note of the key support (uptrendline) that is under test (122-19).

On Monday, (European) investors finally got a chance to give their appreciation on the outcome of the stress tests of the European banking sector. However, the reaction was very tepid. European equities initially gained a few ticks, but the move stalled soon. EUR/USD showed a similar reaction and after some initial gains, the pair soon returned to the 1.2900 mark. As already indicated several times before, the stress tests caused quite a hefty debate between believers and non-believers. Even after Friday, non of the two groups was really able to win the battle. So, EUR/USD traders had to look again for other drivers. Some factors continued to be (mildly) euro supportive. European data of late were surprisingly resilient. Investors understandably question whether this will be sustainable in case global/US growth would slow down later this year. Nevertheless, the differential between US and European (German) yields continues to evolve firmly in favour of the euro. At the short end of the curve (2-year) German yields are now well above their US counterpart. Part of this development of late might be due to ‘technical’ factors, but the difference is in place and rising. In addition, tensions on the (peripheral) European bond markets continue to ease. All this might be euro supportive, in theory, but the biggest move on the equity markets and in EUR/USD came after the publication of the US new homes. The least one can say is that the move was a bit strange. The US new home sales jumped a ‘spectacular’ 23.6%. However, the improvement came on the back of an even bigger decline last month (and a downward revision). In addition, annualized figures can show very wild swings, especially if the serie is at extremely low levels. So, we find the market reaction exaggerated. Nevertheless, equities popped up and EUR/USD made a step higher, too. The pair settled in the 1.30 area and is still hovering there this morning. To conclude, the trigger for the euro performance yesterday was a bit strange, but the single currency continues to profit from easing tensions in Europe and from a risksupportive attitude on global markets.

Today, the calendar contains some auctions of short-term paper of Spain and France. The Netherlands will sell some longer maturities. We don’t expect this to be a big issue for currency trading, but good auction results might still support the euro constructive sentiment. In the US, the CS house prices, the Richmond Fed index and the consumer confidence release will be published. As was the case yesterday, we assume that the EUR/USD reaction will be determined by the reaction on the equity markets. Nevertheless, we have the impression that the euro has become less sensitive to negative news, especially in case of negative news from the US. In this respect, it will be interesting the see the reaction of the euro in case of a decline in the equity markets, due to poor US data. The EUR/USD cross rate is now almost testing the 1.3029 resistance area (reaction high). 1.3095 is still the next important point of reference. Recently, we advocated that the euro has already succeeded a nice rebound and that it would not be that easy for EUR/USD to clear the 1.3095 resistance. We still do not front-run on such a break, but we can not but acknowledge that sentiment on the euro remains reasonably positive. So, EUR/USD longs should not be in a hurry to scale down EUR/USD exposure and can wait and to see how the test of the 1.3095 resistance fares.

On Monday, EUR/GBP for most part tracked the broader euro move. Cable slightly outperformed EUR/USD early in the session. Last week’s strong UK GDP figures might still have supported sterling. However, the 1.55 mark is apparently a high hurdle for cable. So, later in the session the rebound of cable slowed while EUR/USD at the same time steamed ahead in step with the equity rebound after the US new home sales. This triggered a reversal in EUR/GBP. The pair closed the session at 0.8387, compared to 0.8372 on Friday evening. Today, the CBI reported sales will be published. We expect this report to be only of intra-day relevance for sterling trading.

Last Friday’s GDP data will make the debate at next week’s BoE meeting ever more interesting. Recently, it looked that the ‘Sentence’s view’ was only an outlier within the MPC and that the doves would maintain the lead. Even a further easing of policy was not ruled out yet. However, after Friday’s strong GDP data, the case of the doves hasn’t been strengthened. We expect the BoE to maintain a wait-and-see approach for now. So, we still don’t bet on the ‘Sentance’ camp gaining much more ground. In this context, we don’t see a reason for EUR/GBP to break out of its recent consolidation pattern anytime soon. Underlying euro strength might put a floor for last week’s correction in this pair.

USD/JPY continued to struggle on Monday. Global dollar weakness and a lackluster performance of the European equity markets in the wake of the publication of the European stress tests kept the pair in the defensive. The pair reached an intraday low at 86.82 early in US trading. There was a brief up-tick after the ‘spectacular’ rise in US new home sales, but even this rebound was limited and short-lived. USD/JPY closed the day near the intraday lows at 86.88, compared to 87.46 on Friday.

This morning, Asian equity markets are mixed, mostly slightly lower. This context keeps USD/JPY under pressure. From the current levels, the downside in this pair will become more difficult as the market fears BOJ action in case of a drop to the 85.00 area. However, the pair obviously needs very high profile positive news to make any further progress. As we don’t see a trigger for such a news flow anytime soon, the recent stalemate in this pair might still continue for a while.

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