Sunrise Headlines

  • On Tuesday, US Equities closed broadly unchanged as a set of mixed economic data failed to inspire trading. The S&P fell by 0.10%, the first decline in four days. This morning, Asian shares show decent gains after strong corporate earnings.

  • IMF Deputy Managing Director Lipsky said yesterday the most likely prospect was for a moderate, multispeed recovery with significant downside risks, according to excerpts of a closed-door speech.

  • Bank of Japan policy board member Kamezaki said Japan’s economic recovery lacks strength as export growth will likely moderate and government stimulus steps are set to expire.

  • Australian consumer prices rose by much less than expected last quarter while core inflation slowed to its lowest level over three years, giving the central bank scope to extend the pause in interest rate increases.

  • The International Monetary Fund has chosen not to call the yuan “substantially” undervalued, a move that recognises China’s efforts to free up its exchange rates.

  • Britain’s economic recovery will be slower than the government believes and consumer spending will not recover to its pre-recession peak until 2015, according to a prognosis from the National Institute for Economic and Social Research.

  • Crude oil ($77.40) prices dropped significantly on Tuesday after an unexpected increase in US crude stockpiles.

  • Today, the eco calendar contains the US durable goods orders and German CPI inflation data. The Reserve Bank of New Zealand will decide on rates, the ECB publishes its Bank Lending Survey and the Fed will publish its Beige Book.


Markets

Yesterday, the economic data showed a mixed picture. In the morning, euro zone M3 money supply rose by 0.2% Y/Y, while a decline by 0.1% Y/Y was expected. Nevertheless, the lending data showed credit to the private sector stagnated after a slight increase in May and lending to non-financials turned negative again. In the UK, the CBI distributive trades report showed retail sales rose at the fastest pace in more than three years in July. The US data showed a mixed picture as the Richmond Fed manufacturing index dropped less than expected, with an improvement in the number of employees. Conference Board’s consumer confidence, on the contrary, came out slightly lower than expected on the back of a significant deterioration in the expectations component and also the labour differential declined further.

Regarding markets, German bonds remained under downward pressure, but now joined by US Treasuries, even if they closed well off the lows. Return of risk appetite was again the main driver. The publication of the stress tests remained an underlying factor of support, but was additionally helped by strength in European equities and sharply outperforming peripherals. European equities performed well helped by good earnings reports (UBS, and DB), but maybe still more important by signs that the new capital and funding rules, currently under discussion in the Basel Committee are softened compared to previous proposals and will be introduced only very slowly. Not surprising, Southern European equities outperformed.

In the intra-EMU bond market, it seems that shorts in the peripherals are capitulating and booking profits. Yield spreads collapsed in the hardest hit credits. In the 10-year sector Portuguese, Irish, Spanish and Greek spreads fell between 32 and 9 bps. Also the better credits saw their spreads coming in, but certainly more modestly. Spain sold easily €3.429B of 3- and 6-month T-Bills, which got quite some headlines, but the short-term nature of the paper means to us that one shouldn’t draw conclusions from the strong demand for longer term debt. Given the recent strong performance of Spain (and to lesser extent) Italy, we are looking for signs the rally of these credits is running out of steam.

In the US, Treasuries closed near the lows of the day and with yields up 5 to 6 basis points. The eco data were a bit mixed, the Richmond Fed survey a tad better and consumer confidence a tad weaker-than-expected, but after some temporary volatility, they had no lasting impact and Treasuries returned to the lows of the day. Upcoming supply was a negative, but while the 2-year Note auction went very well (stop well below the WI bid and strong bid/cover), it couldn’t lift the market. US equities hovered in a tight sideways trading range throughout the session. Libors continued to ease slightly (contrary to Euribors that are probably under the influence of receding stress and thus higher possibility of the ECB absorbing liquidity earlier than expected and thus leading Euribor ultimate again above the ECB refi-rate). We warned that the Sep T-Note future was testing the important up-trendline (122- 19 yesterday, now 122- 22+), which was broken yesterday. It is a warning signal, but yet no firm evidence that the bullish trend is broken. For that to happen, the contract should drop below 121-20+/14+. Interesting will be whether the uptrendline can be regained.

The ECB allotted €190B in its weekly main refinancing operation (MRO), which was slightly less than the €201.3B that expired. We wouldn’t draw too many conclusions from the results as today a 3-month LTRO tender is held that replaces a small maturing €4.8B LTRO. Even if the allotment at the MRO was smaller than the previous one, it was well over the ECB benchmark allocation (neutral level of liquidity). In recent weeks, excess liquidity has been diminished quite substantially, but more recently the movement seem to have stopped, maybe even slightly reversed. However, we wait for the LTRO later this week to have a clearer view of the liquidity situation on the money market. Whatever, after rising to 0.55% one week ago, the eonia eased slightly to 0.497% on Monday, which suggests that excess liquidity is again increasing or simply that the market reaction on the drawing of liquidity earlier this month was overdone.

Today, the eco calendar contains the first estimate of German CPI inflation (July) and the US durable goods orders (June). The ECB will publish its Bank Lending Survey and the Fed its Beige Book, while the central bank of New Zealand is expected to raise rates. Supply comes from Italy, Portugal and the US.

After a sharp drop in June, German CPI inflation is forecasted to increase to 1.1% Y/Y (from 0.8% Y/Y) in July. On a monthly basis, CPI is expected to have risen by 0.2% M/M. Nevertheless, inflationary pressures are expected to remain low as the recovery is still fragile. Recently, the US durables were rather volatile partly due to the transportation component. For June, the consensus is looking for an increase by 1.0% M/M due to a sharp increase in Boeing orders. But also durables excluding transportation are expected to show a rise (by 0.4% M/M). The eco data shouldn’t have too much impact on the bond markets.

The ECB bank lending survey is currently interesting, because of the financial crisis. In the April survey, the results were little changed from the January one. It showed an unchanged net tightening of credit to enterprises, but an increase in the net tightening of credit standards on loans to households for house purchases. Looking forward, banks expected the net tightening for loans to enterprises to be broadly unchanged in Q2 too and expected a decrease in net tightening of credit standards for housing loans. If the survey would show a substantial decrease in net tightening, it would show the situation in the banking sector is improving. This might be somewhat negative for bonds and especially for the shorter end. However, the shorter end has already underperformed recently.

The Fed Beige book, a preparatory document for the August FOMC meeting, describs developments in the economy via anecdotal evidence gathered by the regional Fed banks. Usually there is a close relationship with the published data, but it might be slightly timelier. Markets will closely look to the evidence on the labour market and on manufacturing, the most cyclical part of the economy. Recent labour market data (consumer confidence report, initial claims) showed sluggish conditions and Bernanke emphasized the labour market sluggishness in his testimony, while the regional manufacturing surveys showed a sharp slowdown. Any deviations from this picture in the Beige Book may be picked up, but overall we think the message in the Book will be closely to the message from the eco reports.

Regarding supply, the EMU calendar is not so important with a small (€0.75-1.25B) tap by Portugal of its 3.6% Oct 2014 OT & 4.95% Oct 2023 OT. The sentiment improved recently towards the peripherals, including Portugal and thus we expect the auction to go well. The Italian BTPei auction is less important for the overall bond market. In the US, the Treasury will auction a $37B 5-year T-Note. It will raise all new cash upon settlement. The size of the auction is $1B smaller than in June which is a positive, as is the good reception of 2-year paper yesterday. Last month though, the 5-year Note auction went poorly, but the back-up in yields recently should draw enough demand to ensure a successful auction.

Bond market trading will probably be determined today by the reigning sentiment more than by the eco data. This means that there could be again some downward pressures or in case of intra-day rallies, these may be aborted by selling. The correlation with equities has been rather weak recently, but better Asian trading makes us think that European equities may also open higher, a slight negative. On the other hand, the S&P might find it difficult to pass the 200 day moving average (1113) or if broken the previous high (1131) (see graph). So, the risk of (much) higher equities in a short term perspective is small. Together with the oversold character of the US and German bond market and the rally in peripherals that may lose some steam, we think that in a short term perspective, the downside should be protected. This means 127.60/12 for the Bund and 121-20+/14+ for the Sep T-Note future. However, we would shy outright long positions, but favour more a sell-on-upticks tactic.

On Tuesday, the euro remained well bid. The pattern was more or less similar to the one on Monday. The European currency held near the closing levels of the previous session during the morning trading in Europe, but was lifted going into the start of the US trading session. The German GFK consumer confidence prolonged the series of good eco data from Europe/Germany of late. The immediate impact on EUR/USD trading was limited, but it reinforced the overall positive sentiment on Europe. European equities were well inspired too, supporting risk taking and the single currency. EUR/USD moved temporary north of the 1.3029 (recent high) just before US traders came in. So, the 1.3095 resistance (May 10 high) came in the picture. However, the tide turn (a bit) after the US CS house prices showed a bigger than expected rise. This was of course risk supportive, but this time the better than expected US data helped the dollar and EUR/USD returned south of the 1.30 mark. US consumer confidence was slightly weaker than expected. Tentative gains in US equities were capped and there was also no driver for EUR/USD trading anymore. EUR/USD closed the session at 1.2996, almost unchanged from the 1.2994 close on Monday evening.

On the sidelines, the Swiss franc is ceding quite some ground, too. This is another indication that the pressure in the euro zone is easing.

Today, in the US the mortgage applications and the durable orders are scheduled for release. The durable orders are interesting, but it is a very volatile series. Once gain the question is which currency will profit from good US news (if it were to occur): the dollar or the euro via the stock market reaction. The European calendar only contains the German CPI, Italy will sell inflation linked bonds (no issue for the currency market). Portugal will sell a small amount of bonds maturing 2014 and 2023. Recently, good auctions of peripheral bonds often got quite some coverage on the financial news providers. However, we have the impression that global markets have more or less discounted that the funding of these countries is no big issue anymore, at least not for now. So, the impact of a successful auction on the euro shouldn’t be spectacular. Later in the session, currency traders will also keep an eye on the Fed’s Beige Book. A soft tone in the report would be dollar negative. Markets will especially monitor the assessment on the situation in the labour market.

Recently, the euro was in very good shape. From a technical point of view, the question is now whether the EUR/USD cross rate will be able to take out the 1.3095 (10 May high). A break above this level could be seen as a further symbolic scaling down of the euro-skepticism that remained in place, even after the announcement of the huge rescue package during the weekend of 8/9 May. Recently, we held a tactically inspired approach as we thought that the euro had already succeeded a nice rebound (from 1.1877 to 1.30 +). In this framework we assumed that it would not be easy for EUR/USD to clear the 1.3095 resistance, especially not if there was not high profile event to trigger more euro strength and/or dollar weakness. We still do not front-run on such a break, but we are aware that the chances for a break are on the rise. 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.

EUR/GBP initially more or less tracked the prices moves in the euro. Euro strength pushed the EUR/GBP pair temporary north of the 0.8400 mark but the gains could not be sustained. A first attempt of cable to regain the 1.55 mark early in European trading was rejected, too. This caused some temporary sterling weakness. However, a second attempt succeeded and cable outperformed EUR/USD later in the session. Regarding the UK eco data, the CBI sales for the month of July came out strong, giving sterling some additional support. The pair dropping below the 0.8370 intraday support area reinforced the EUR/GBP decline. EUR/GBP closed the session at 0.8334, compared to 0.8389 on Monday. So, once again the pair showed quite some intraday volatility, but in the end the pair is still developing within the recent consolidation pattern.

Today, the calendar of UK eco data is empty but BoE’s King and some other policy makers will testify on the May inflation report before the Parliament’s Treasury Committee. Of course, the May inflation report is outdated news and a new one will already be available at next week’s BoE meeting. Nevertheless, the views of the different members (including Sentance) during the hearing could still be interesting.

Recent eco data (Q2 GDP, yesterday’s sales data) will make the debate at next week’s BoE meeting ever more interesting. Recently, it looked that the ‘Sentance’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, the most recent eco data didn’t serve the case of the doves. Nevertheless, we expect that it is too early for the BoE to change course already at this stage. So, we expect them to keep a waitand- see approach for now. In this context, we don’t see a reason for EUR/GBP to break out of its recent consolidation pattern anytime soon. In a day-to day perspective, EUR/GBP is again close to the 0.8317/18 support area. A break below the level would open the way for the pair to move somewhat further south within this broader consolidation pattern.

On Tuesday, USD/JPY finally managed the move away from the recent lows. The be honest, we didn’t see the exact trigger. A decent performance of the European equity markets helped to support the risky cross rates. To be honest, recently the pair often ignored a good stock market performance. So, probably technical considerations played a role, too. The low 86.00 area recently proved to be a tough support and this might have encouraged the bulls. In the US, the pair reached an interim high after the publication of the CS house price. US equities failed to build out gains after the consumer confidence release but even this didn’t prevent USD/JPY to stage another upleg. A rise in US bond yields (across the curve) might have supported the dollar against the yen. The pair closed the session at 87.90, again of more than 1 big figure compared to the 86.88 close on Monday.

This morning, Asian equities show decent gains (with Japan outperforming), but this time it is not enough for USD/JPY to extend yesterday’s gains. Recently we had a wait-and-see approach on this cross rate. We felt that the downside in this pair had become more difficult as the market feared BOJ action in case of a drop to the 85.00 area. However, we didn’t see a positive trigger to unlock the recent stalemate. Yesterday’s move is a first indication that the sentiment is gradually improving. A further rise in US interest rates, in case it would be extended, could give the pair some additional support.