• US Treasuries profit from safe haven buying
  Ongoing weakness in equities, this time on a Lehman report about Fannie and Freddie, supports Treasuries. The curve steepens in bullish fashion. All Treasury maturities are now at crucial resistance levels that if broken would improve the technical picture. The calendar is again unexciting today, but equities and oil will keep traders awake.
• European bonds try to break above first key resistance levels
  Yesterday, the European bond markets extended their recent gains above first important resistance levels. A confirmation today would signal sentiment is improving. Although inflation worries may still come back, market attention is currently focused on the economic woes. More equity losses would only further support the bond markets.
• Renewed credit concerns block dollar rebound
  The dollar took a strong start to the new trading week, but resurfacing (US) credit concerns block the rebound of the US currency. The technical picture for the major dollar cross rates remains highly indecisive. For now, the G8 meeting also provides no trigger to unlock the current deadlock.

The Sunrise Headlines

• US equities continue their slide and close 0.50% (Dow) and 0.8% (S&P) lower, as financials (Lehman report) and energy (drop oil) sell off. Tech sector outperforms
• Asian equities fall overnight on renewed nervousness on the financial sector following Wall Street
• World economy faces uncertainty and downside risks, also due to oil, says G-8
• US bank shares plummeted to lowest level in a decade on more analysts’ reports on soaring credit losses and fears Q2 earnings will again disappoint.
• Freddie Mac and Fannie Mae sharply down on Lehman report that suggests they may need more capital (75 billion $), also because of a change of accounting rules.
• Crude oil fell sharply yesterday in a profit taking move that hit other commodities too, down 3.92 $ to 141.37 $/barrel during another volatile session, but is half a dollar higher overnight on the first hurricane alert of the year and supply concerns at Mexico oil field.

Currencies: Renewed Credit Concerns Block Dollar Rebound

On Monday, EUR/USD trading first was mostly driven by technical factors as the calendar was thin. The dollar was well bid at the start of the new trading week pushing EUR/USD to the 1.5620 area at the start in Europe. Expectations for the G8 to take a bolder approach to slow the decline of the US dollar were a good excuse to drive EUR/USD lower in the established range. German production data came out weak, while sliding oil prices were a support for the USD, too. However, later in US trading credit concerns came again into the spotlight as a US investment bank published a report that Fannie Mae and Freddie Mac might need to raise a huge amount of additional capital. So, at least for now, negative (US) credit related headlines apparently are a factor of importance for the US currency. EUR/USD recouped the early losses and closed the session at 1.5728 compared to an1.5706 close on Friday.

Today, the European calendar is again empty. In the US some second tier data will be published. From an intraday perspective we keep an eye on the pending home sales. Mr. Bernanke speaks on financial regulation. This is important, but if he wants to address market sensitive items, its appearance before the House Financial Services Committee on Thursday probably is more suitable. Markets will also continue to watch the G8. However, at least for now, the meeting didn’t yield many high profile comments on the dollar. The statement after the second day only had a message on emerging markets as it said that ‘In some emerging economies with large and growing current account surpluses, it is crucial that their effective exchange rates move so that necessary adjustments will occur’.

Already for some time, we have a neutral bias on EUR/USD and assume the pair to extend its sideways trading in the wide 1.6020 to 1.5285 range. The US and Europe both faces a similar context of low/slowing growth and the Fed and the ECB have very little room of maneuver. The ECB is more inclined to take bold interest rate action, which is a short-term positive for the single currency, but last week Trichet also indicated that he will be cautious in modeling its monetary response to the inflation threat. So, the prospects for additional interest rate support for the euro are limited.

Technically, EUR/USD tested the key 1.5842 area last week. However a break could not be sustained and after the US payrolls and the ECB press conference, EUR/USD fell back in the longstanding sideways range. The short-term momentum is still slightly euro positive and the single currency still gets the benefit of the doubt in times of renewed market stress. However, we hold on to our view that we don’t see many fundamental arguments for EUR/USD to move aggressively higher over time. If the eco situation in Europe continues to deteriorate, markets will question the adequacy/room for additional ECB interest rate hikes and if the ECB sticks to a tough anti-inflationary approach, it might push the economy over the cliff, killing growth and laying the groundwork for a euro decline

EUR/USD: dollar rebound blocked by renewed credit woes

Support stands at 1.5673 (Break-up) 1.5627/11 (Daily envelope + Bollinger mid-line/St low) and at 1.5576 (MT break-up hourly), at 1.5535/27 (Reaction low/MT Break-up + weekly envelope).

Resistance is seen at 1.5741/52 (STMA/Reaction high), at 1.5765/73 (daily envelop breakdown daily), at 1.5795 (62% retracement ST), at 1.5874/94 (breakdown hourly/Bollinger top), at 1.5909 (Reaction high).

The pair is in neutral territory

USD/JPY

On Monday, USD/JPY trading showed two different faces. In Asia and early in European trading the dollar gained some ground. A cautiously better sentiment on the equity markets, a lower oil price and markets betting on USD positive comments for the G8 caused USD/JPY to test offers in the 107.75 area early in US trading. However, later in the session renewed credit woes and receding stock markets caused USD/JPY to give up its previous gains and the pair closed the session at 107.18, marginally higher compared to the 106.80 close on Friday.

This morning, there were only some second tier eco data on the agenda in Japan. Asian stocks feel the heat from the negative credit headlines in the US yesterday evening and this gives the yen some (albeit moderate support), capping the upside in USD/JPY.

Recently, we turned neutral on USD/JPY. The rejected test of the 108.58/62 area triggered a correction, but also this move petered out last week. The pair currently tries to regain the medium term moving average (106.90) and the uptrend line from the lows. If this attempt succeeds, it would improve the short-term technical picture. However, for the pair to resume the gradual uptrend of late beyond the key 108.60 area, an easing of global market tensions and/or a material decline in the oil price are needed. Those conditions are not fulfilled, convincing us to maintain a wait-andsee approach.

USD/JPY: dollar rebound blocked by renewed credit woes

Support stands at 106.81 (Daily envelope), at 106.73/63 (STMA/ST low), at 106.30 (LTMA), at 105.93/71 (Reaction lows + Bollinger bottom) and at 104.99 (Last week low).

Resistance comes in at 107.39/60 (Break-down/Uptrendline),at 107.75/77 (ST high/daily envelope), at 108.16 (Weekly envelope), at 108.58/62 (Reaction high/14 Febr. high).

The pair is in overbought territory

EUR/GBP

On Monday, EUR/GBP decoupled from the price action in EUR/USD. Poor UK production data fuelled fears that the UK economic is losing momentum at an accelerated pace and caused EUR/GBP to move higher from the 0.7920 area to around 0.7960 after the publication of the data. Later in the session, EUR/GBP hardly reacted to the rebound in EUR/USD, which was a dollar move initiated by negative headlines on the US mortgage agencies. Nevertheless, at the end of the session sterling still traded materially lower in a day perspective. EUR/GBP closed the session at 0.7959 compared to 0.7924 on Friday.

Today the UK calendar is again thin with only the DCLG house prices on the agenda.

Since mid April, EUR/GBP develops a very uninspiring consolidation pattern (0.7766/0.8098). We turned neutral on EUR/GBP recently as an attempt to move higher ran into resistance (0.7955 area) and as the pair shows no trading momentum at all. Last week, the pair again tried to move above that key resistance area on global euro strength, but also this attempt failed. In a day-to-day perspective, it looks as if the EUR/GBP pair is again traded with a slightly positive bias, but a sustained break above 0.8018 is needed to conclude that the pair is able to unlock the current stalemate. We hold on to our view that the room for a sustained comeback of the sterling is limited. The 0.7766 is the key range bottom that should provide strong support

EUR/GBP: stalemate persists.

Support comes in at 0.7941 (STMA), at 0.7928/21 (Break-up/daily envelope + MTMA), 0.7900/94 (ST low) at 0.7885 (Break-up), at 0.7868 (last week low) and at 0.7847/31 (S4, reaction lows).

Resistance stands at 0.7967 (Reaction high/Bollinger top), at 0.7978/80/86 (breakdown hourly/weekly envelope/Daily envelope) and at 0.8003 (Reaction high).

The pair is moving into overbought territory.

News

EMU: German production slows down

German industrial production plunged in May, as it fell 2.4%M/M to be up a feeble 0.8% Y/Y (5% Y/Y in April. Consensus was looking for a small rise. The decline was driven by a large 2.6% M/M decline in the cyclical manufacturing output, the second consecutive monthly drop. While special factors were probably at work, the report points to a sharp softening of activity in the industrial sector and a negative contribution to Q2 GDP. Q1 production was unusually strong due to weather-induced construction output.

Other: UK industrial production falls in May

In the UK, industrial output fell by 0.8% M/M and 1.6% Y/Y in May. The drop in output was mainly due to the manufacturing sector (-0.5% M/M) and energy supply (- 5.2%), as demand for electricity and gas declined because May 2008 was the warmest May on record across the UK. Within the manufacturing sector, there was a significant decrease in the machinery and equipment industries, which suggests that companies are reining in investments. This would be bad news, as also from the consumer side no improvement should be expected given the deteriorating situation on the housing market, labour market and the negative impact of inflation on disposable incomes.

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Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.