FOREX TRADING

News and Events:

It’s been a very subdued start to the week due to UK and US public holidays; but the lack of movement in currency markets is perhaps surprising considering it’s been another weekend dogged by credit downgrades to Spain’s AAA status by Fitch, and indeed new worries about France’s resilience to dreaded ratings agency downgrades. With the underlying discontent in Europe still showing no credible signs of letting up, investors can expect EUR rallies to be labored, and whilst a positioning correction could indeed come any day now, we still favour selling after rallies rather than trying to ride them higher. Whilst low liquidity makes for slow trading this Monday morning, there is still a decent itinerary of economic data coming up both today and tomorrow that could spice things up. The main focus for us will be on Canadian quarterly GDP (Q1) which is expected to accelerate to 5.8% QoQ annualized compared to the previous 5.0%reading. Recent comments from BoC Governor Carney suggested that Q1 growth was ticking above the bank’s original forecasts, and the timing of the release is made all the more significant considering that tomorrow brings the BoC’s latest rate decision. Given the strong recovery in Canadian fundamentals, the prevailing dovishness from the BoC had been a cause of some frustration and bewilderment in recent months, but last month’s meeting did give CAD bulls some tantalizing bait. Recall that in the previous statement accompanying the on-hold decision, the central bank chose to drop its conditional commitment to low rates until the end of June – an omission that has now prompted consensus predictions to be for a hike of 25bps to 0.50% this time around. We do like CAD as one of the most likely currencies to perform robustly in the remainder of the year, but with a hike already priced in for tomorrow, there is clearly some scope for disappointment. As with many risk trades (and particularly as a commodity currency), there are big caveats for the CAD outlook should the economic problems dogging Europe and fragile global recovery deteriorate once more, and given the BoC’s penchant for being cautious coming out of this recession, expect significant CAD selling should they keep rates on hold and adopt the wait-and-see strategy. (more…)

The confidence in the euro zone is negatively affected from the debt crisis that exists in Greece, Spain, Portugal and Italy which is exhausting the economic recovery of the euro zone. From the debt crisis, the economic outlook confidence index slipped worse than expectations.

Business climate indicator for May improved to 0.34 from 0.23 beating the estimated 0.20. The industrial confidence improved to -6 from -7 while services confidence dipped to 3 from the prior and projected reading of 5 and 6 respectively.

Consumer confidence stood unchanged at -18 while economic confidence also for the same period, in May fell to 98.4 from 100.6 which was also what the markets were estimating.

Confidence is sabotaged in the nation as government’s started applying austerity measures to reduce spending and increase savings, as a way to narrow the deficit which is weighing on the outlook of the euro zone.

Also the weaker euro versus the dollar is increasing import prices therefore the end user pays more for a good or service, which also weighs on confidence levels and is reflected in crippled consumer spending. (more…)

• US Equities dropped late on Friday, after Fitch Ratings downgraded Spain’s debt to AA+ from AAA, but said the country’s outlook is stable. The Dow/S&P fell by 1.20% led by financials. This morning, most Asian shares reversed their opening losses.
• Rating Agency Fitch removed Spain’s AAA credit rating, lowering it by a notch, on expectations that the moves to cut the nation’s debt will slow its economic growth.
• France admitted yesterday that keeping its top-notch credit rating would be a stretch without some though budget decisions, following German hints that Berlin may resort to raising taxes to help bring down its deficit.
• US Federal Reserve Chairman Bernanke said this morning that the world economy depends ever more on emerging markets to maintain strong domestic growth and economic and financial stability.
• Japanese factory output rose less than expected in April, suggesting that growth in manufacturing will slow in the coming months as the benefits of robust exports to fast-growing Asian economies may be moderating.
• The UK economic recovery is underway, but the country faces heightened threats from the worsening crisis in the euro zone and upheaval in global financial markets, the British Cambers of Commerce said.
• India’s economy grew an expected 8.6% in the first quarter from a year earlier, driven by robust manufacturing sector on the back of government and consumer spending.
• Chinese Premier Wen Jiabao warned this morning that global economic growth remained vulnerable to souvereign debt risks and the possibility of a second downturn, while saying his own country’s growth remained on track.
• Today, the eco calendar contains the euro zone M3 money supply and credit growth data, the European Commission confidence indicators and first estimate of euro zone CPI.

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Wakeup Call: Fitch Cuts Spain’s AAA Rating, May Weaken European Financials Further Today

Short-term outlook for stocks is set to ‘sell on rallies’.

What’s going on?

Fitch cuts Spain’s AAA rating (to AA+). That could continue to weaken European financials today.

Some of our long-term trend indicators are turning around (bearish) and money markets indicators still signal increasing tension due to the PIIGS sovereign debt crisis and the interbank market. We change our short-term outlook for stocks to ‘sell on rallies’.

Stories now beginning on how yields on Chinese property bonds are rising. Investors are increasingly nervous on China. Commodities still weak due to this, but Oil and Gold doing well.

Watch out for Canadian figures today.

Calendar (more…)

CHF

The pre-planned buying positions from key supports have been implemented with attainment of basic anticipated targets. OsMA trend indicator, having marked preserved close parity of party activity, as earlier, does not clarify the choice of planning priorities for today. Therefore, considering period of rate range movement, we can assume probability of rate return to close 1,1500/20 supports, where it is recommended to evaluate the development of the activity of both parties in accordance with the charts of a shorter time interval. As for short-term buying positions, on condition of the formation of topping signals the targets will be 1,1560/80, 1,1600/20 and (or) further break-out variant up to 1,1660/80, 1,1720/40. The alternative for sales will be below 1,1460 with the targets of 1,1400/20, 1,1340/60, 1,1280/1,1300.

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EUR/USD closed lower on Friday and the low-range close sets the stage for a steady to lower opening on Monday. Stochastics and the RSI are diverging but are bearish signalling that additional weakness is possible near-term. If it renews this year’s decline, monthly support crossing is the next downside target. Closes above last Friday’s high crossing are needed to confirm that a short-term low has been posted.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD attempted to push higher on Friday, topped at 1.2452 but whipsawed to the downside, bottomed at 1.2268 and closed at 1.2306. This fact keep the major bearish scenario testing 1.2000 intact but as you can see on mt h1 chart below price still move inside the minor bullish channel indicating the bullish correction is still alive and kicking. Immediate support at 1.2260 area. Consistent move below that area could trigger further bearish pressure testing 1.2140/50 area which is a key support area that must be broken before testing 1.2000. On the upside, initial resistance is seen around 1.2450/70 area. Break above that area could trigger further upside pressure testing 1.2671 region. It is still a difficult and volatile market out there so don’t rush jump into the market and stay discipline with your own trading criteria. Plan your trade and trade your plan.

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Last week, there was a slide in commodity related currencies, and risk correlated pairs. The Japanese yen and US Dollar were beneficiaries of this environment. This week, we saw this dynamic reverse a bit. Still, this may still be just consolidation setting up for continuation. On the other hand, it is always prudent to entertain the reversal scenario as well. Let’s juggle with these two scenarios entering into the next week.

EUR/USD Supported at 1.2150

Daily and 4H: The 1.2440 (61.8% retracement) level was tested, and resistance held up. The 1.2150 area is the current support, and was also respected.

If the market breaks below 1.2150, a swing towards 1.17 is suggested.

A break above 1.2440 suggests a continuing consolidation that may retest this week’s high at 1.26.

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HIGHLIGHTS OF THE WEEK

• First quarter U.S. real GDP growth came in at 3.0% Q/Q (annualized), slightly below expectations.
• U.S. consumer confidence in April shot up to the highest level seen since March 2008, marking the sixth increase in seven months.
• Personal income advanced 0.4% M/M in April, while personal spending was flat on the month.
• New home sales surged 15% in April, sending inventories down to 5 months supply; existing home sales jumped 7.6% on the month, but inventories managed to rise to 8.4 months supply.
• S&P Case-Shiller Home Price Index was flat in March, though prices are sitting at 2.3% above year ago levels.
• Concerns over European sovereign debt subsided somewhat this week, assisted in part by China’s denial on Thursday that it will reconsider its investments in European government bonds.
• After having shed close to 5% so far in May, the S&P TSX gained 2% during the week.
• The uptick in risk appetite led to a retreat from government issued bonds and a rise in bond yields.
• At the margin, the likelihood that the policy rate renormalization would begin on June 1st in Canada may have risen following the easing of concerns over Europe’s debt turmoil as we head into the weekend.
• Risks surrounding the specific future path of the overnight rate will persist as long as external risks stemming from European sovereign debt concerns linger.

UNITED STATES – ECONOMY QUIETLY CHUGGING ALONG

As markets remain focused on the situation in Europe, the U.S. economy continues to quietly chug along. The BEA’s second estimate of first quarter real GDP growth was released this week, and despite falling below expectations, the economy still advanced at a decent 3% Q/Q annualized clip. And looking ahead to the current quarter, it appears as though the recovery continues to gain traction.

Consumers are beginning to feel the benefits of the recovery, as evidenced by the surge in consumer confidence in April to the highest level seen since March 2008. While it is unclear as to whether the current financial market turbulence is reflected in these results – and should it persist, confidence may reverse course next month – the fact that both present circumstances and future expectations increased in April is a good sign for the economy. Indeed, rising consumer confidence and, in particular, an improvement in employment prospects, tends to lead to increased household demand, suggesting that consumer spending will be a supportive factor to economic growth in the coming months.

The personal income and spending data that were released this morning, although mixed, offered some support to this view. Personal income advanced by 0.4% in April, and this came despite a decline in government benefits during the month. Meanwhile, real personal consumption expenditures were flat on the month. However, this slowdown in spending growth follows two months of strong gains. And with income growth on the rise, and job creation expected to continue going forward, the recent uptrend in personal spending is likely to remain intact, growing by about 3.0% in the second quarter.

On the housing front, the momentum from the first quarter of the year continued into April, both in the new and existing home markets. New home sales shot up by nearly 15% on the month, extending the 30% jump seen in the month prior. This pushed the level of new homes sold over the 500,000 mark for the first time since May 2008. As a result, inventories slid to only 5 months supply – a rate that hasn’t been seen since the end of 2005. Existing home sales were also impressive in April, rising by a better-than-expected 7.6%. But despite this increase, inventories also managed to rise, hitting 8.4 months supply. Going forward, the housing environment is likely to become more challenging in the near term. Much of the strength in home sales in recent months has been driven by the homebuyer tax credit that expired at the end of April. Hence, we are likely to see some payback in the coming months. Moreover, foreclosures remain a big issue in the U.S., and alongside the slowdown in sales, will lead to even higher inventory levels in the existing home market. This doesn’t bode well for home prices, which, according to the S&P Case-Shiller Home Price Index, are sitting at only 2.3% above the depressed levels seen last year. Still, any near term price declines will likely be limited, as home values have moved roughly in line with income and rent fundamentals, which appear to be gradually improving.

While the U.S economy is clearly still facing several headwinds, including a slow grind up in the housing market, all signs point to a continued recovery. Indeed, the strong hand off from the first quarter, and the first wave of April data, suggest that second quarter real GDP growth will likely match, or even outpace, the rate seen during the first three months of the year. The problems in Europe and the rise in the U.S. dollar do present some downside risks to economic growth down the road. However, we believe that only a slight trimming in growth forecasts will be necessary

CANADA – STRENGTHENED SUPPORT FOR MONETARY POLICY TIGHTENING

Concerns over European sovereign debt subsided somewhat this week, assisted in part by China’s denial on Thursday that it will reconsider its investments in European government bonds. After having shed close to 5% so far in May, the S&P TSX gained 2% during the week. Spurred by some reversal in flight-to-safety flows from U.S. Treasuries, the Canadian dollar joined other major currencies, including the Euro, in strengthening. By week’s end, the loonie was trading at 95 US cents. The uptick in risk appetite led to a retreat from government issued bonds and a rise in bond yields. Yields on Canadian government notes with a 2-year maturity rose by 10 basis points alongside the rally in equity markets.

In order to restore confidence in the euro and try to appease financial markets, Italy, Spain, Portugal and the United Kingdom followed Greece’s footsteps and unveiled their respective fiscal austerity plan. While well-received by investors, doubt still lingers over whether or not these plans, combined with the emergency 750 billion euro facility, can be implemented effectively.

Importantly for Canada, the improvement in risk appetite notably supports commodity prices and equities. Crude oil near futures edged up to reach near US$75 per barrel as of Friday morning alongside the prior day’s equity gains as well as data released in the U.S. showing an increase in oil demand. Oil prices have yet to stabilize on a trend basis, however, after sliding from near US$87 as of April 5th. Lower energy prices present some downside risk to Canadian equities, incomes, and some provincial fiscal balance sheets leveraged to royalties on this resource.

While recent fluctuations in Canadian financial markets have largely reflected international developments, markets should be more in-tune to domestic economic releases next week. Canada’s real GDP figure for the first quarter will be released on Monday, with a consensus forecast calling for a quarterly GDP annualized growth of 5.8%. Our own call is for a slightly better performance of 6.0% growth.

This will be followed by an interest rate announcement by the Bank of Canada (BoC) on Tuesday. Real economic growth will likely be sufficiently high to meet the BoC’s expectations. As such, this should present the BoC with an opportunity to raise the overnight rate off of its emergency level of 0.25%. Futures markets are fully pricing in a rate hike of 25 basis points, which would bring the overnight rate to 0.50%. At the margin, the likelihood that the policy rate renormalization would begin on June 1st may have risen following the easing of concerns over Europe’s debt turmoil as we head into the weekend. At the international level, the OECD also stressed the need for the BoC to begin raising its overnight rate “without delay”.

Accompanying a BoC move could be a dovish statement outlining European sovereign debt concerns as the dominant downside risk to the outlook. Faced with the prospect of a possible pause in the hiking cycle if financial turmoil were to resurface, markets would refrain from pricing in too much near-term tightening. The absence of such dovish overtones in the BoC statement would likely induce a bond selloff and push the Canadian dollar closer to parity.

Risks surrounding the specific future path of the overnight rate will persist as long as external risks stemming from European sovereign debt concerns linger. Even though Canada maintains modest trade with – and financial exposure to – European markets, it will not be sheltered from the expected volatility in the price of its commodities and financial markets. These fluctuations, however, are so far unlikely to yield more than a modest trimming to Canadian growth forecasts for 2011. Nonetheless, those looking for resolution and clarity in the BoC statement may be underwhelmed. The BoC will more likely keep its cards as close to the chest as possible, giving itself the needed flexibility that such volatile times demands.

U.S.: UPCOMING KEY ECONOMIC RELEASES

U.S. ISM Manufacturing Report – May

• Release Date: June 1/10
• April Result: 60.4
• TD Forecast: 58.5
• Consensus: 59.5

The ISM is expected to edge down to 58.5 in May after rising to a six year high of 60.4 the previous month. New orders, employment, and production are all set to decline from the torrid pace the previous month while inventory building should edge higher and deliveries hold steady. The ISM has been exceptionally strong benefitting from strong exports and domestic inventory demand and investment spending. Over coming months, two of those three pillars of support are expected to diminish. Export orders hit a cycle high of 61.0 in April, but recent dollar strength and slowing demand from euro area countries will depress an important source of manufacturing strength going forward. Remember, almost 80% of exports are manufactures of some type, so the effect will be more muted on the services ISM index. Prices paid hit a cycle high of 78.0 in April, but the roll over in commodity prices as well as energy prices over the reference period, combined with plunging unit labor costs, should push this measure to 70.0, or lower.

U.S. Nonfarm Payrolls – May

• Release Date: June 4/10
• April Result: 290K; unemployment rate 9.9%
• TD Forecast: 475K; unemployment rate 9.8%
• Consensus: 500K; unemployment rate 9.8%

The May employment report is expected to show ongoing momentum in job creation remains intact. The headline gain of 475k (500k consensus) will be driven disproportionately by census hiring which has thus far been well below average. May is the big hiring month for census workers and tepid hiring to date may result in an even larger headline gain currently anticipated. Still, the focus will be on the pace of private job creation. Here we expect about 175k which would represent another strong monthly gain though modestly below the 231k pace in April. The deceleration in private job hiring will be concentrated in manufacturing 10k (44k in April) and business services 40k (80k in April). The unemployment rate is forecast to dip to 9.8% from 9.9%, but we admit the balance of risks is skewed to a lower rate given the surge in the labor force last month and the knock on effects from census hiring. Wage growth will remain tepid posting a 0.1% gain leaving the y/y change unchanged at 1.6%.

CANADA: UPCOMING KEY ECONOMIC RELEASES

Canadian Real GDP – Q1 /10

• Release Date: May 31/10
• Q4 Result: 5.0% Q/Q ann.
• TD Forecast: 6.0% Q/Q; Consensus: 5.8% Q/Q

The Canadian economic recovery was in full force in the last six months and it now looks like real Canadian GDP grew close to 6.0% annualized in the first quarter of 2010, following a strong gain of 5.0% in the previous quarter and significantly greater than the 3.8% we were anticipating. That’s as V-shaped as economic recoveries come. Nearly every component of real GDP posted robust gains in that quarter with domestic demand at the top of the list. The pace of retail spending over the first three months of 2010 suggests growth in consumer spending was in the range of 4.5-5.0% led by spending on discretionary durable items. Moreover, residential investment is expected to grow by a second consecutive gain of 30%, bolstered by strength in new homebuilding. Leading indicators suggest that business investment in machinery and equipment was up 10%, following a contraction in the previous quarter. This is a good sign that businesses are finally feeling more optimistic about future economic prospects. The caveat of the report will be household debt. Household debt as a percent of personal income likely grew to a record high 147% as households funded consumption through borrowing. As interest rates begin to rise and households have to devote a greater share of their income to servicing their debt, this may well constrain future consumer spending growth.

Bank of Canada Interest Rate Decision

• Release Date: June 1/10
• Current Rate: 0.25%
• TD Forecast: 0.50%
• Consensus: 0.50%

The Bank of Canada is grappling with a strong domestic economy versus substantial downside risks to the global and financial outlook. We believe the balance of evidence continues to argue for a 25bps rate hike on June 1st, though the probability of this action is not greatly in excess of 50%. The housing market is still extraordinarily strong, consumers continue to spend with conviction, and an overnight rate near zero seems anachronistic in this context. While it might initially appear unseemly for the Bank to hike into a severe stock market correction, it would arguably be even more frightening to the market if a peripheral country like Canada was worried enough to defer rate hiking despite such compelling domestic arguments. In the event that conditions deteriorate further, the Bank can always pause later in its tightening cycle, with minimum damage done.

Canadian Employment – May

• Release Date: June 4/10
• April Result: 108.7K; unemployment rate 8.1%
• TD Forecast: 15.0K; unemployment rate 8.1%
• Consensus: 20.0K; unemployment rate 8.0%

The Canadian labour market has been on fire lately, adding jobs in each of the last 4 months at an average pace of close to 50K per month. This positive momentum in labour market activity should continue in May, though we do not expect an encore performance following the staggering 109K jobs that were added the month before. In fact, with the pace of job gains in April far outpacing levels consistent with the current stage of the economic rebound, we expect the number of jobs added in May to drop markedly, with only 15.0K net new jobs created. Strong construction activity and a rebound in manufacturing sector employment should ensure that the goods-producing sector of the economy will continue to add jobs in May, while the service sector should shed jobs following the blistering 106.6K positions that were added in April. The unemployment rate is expected to remain unchanged at 8.1% as more displaced workers move into the labour force in search of jobs. Over the next few months, we expect the pace of job creation to move back within the 20K to 40K range, as the Canadian economic recovery continues to gain self-sustaining momentum. The unemployment rate should continue its downward trajectory.

PDF Format

U.S. Review

Some Good and Not So Good Data This Week

• The panic that gripped global markets over the past two weeks appears to be easing a bit. It helps that the economic data coming out of the United States suggest a sustainable recovery is now well underway. On the positive side, consumer confidence rose more than expected in May. The April durable goods orders and the May Richmond Fed survey confirmed that the U.S. manufacturing expansion continues to gain traction.
• Less good was the slight and unexpected downward revision in Q1 U.S. GDP growth, and U.S. home price data that reveal home prices beginning to roll over again.

Two-Speed Recovery Continues

The U.S. economic recovery continues to show its Dr. Jekyll and Mr. Hyde sides. Perhaps that is a factor behind the schizophrenic stock market behavior of late. An “unbalanced” or “two-speed” recovery remains the current state of affairs. This is disappointing to the bulls that have been rampaging on Wall Street since March 2009, trumpeting the strong return of corporate earnings, while whispering the recovery is looking stronger than the consensus had expected. There were plenty of reminders this week that the bulls’ case for a normal or robust recovery from deep recession remains a long shot.

On the labor market front, initial jobless claims refuse to drop to levels that would suggest a swift return of a normal private sector payroll growth during an economic recovery. The four-week moving average of initial jobless claims, a more stable indicator of job trends than the weekly number, has risen for two consecutive weeks now, even though initial claims dropped by 14,000 to 460,000 in the latest week. Initial claims have clearly been trending around the 450,000 level for months now, when we would like to see them slip back to the 350,000-400,000 level that often characterizes a normal labor market during economic expansion. Thankfully, other employment indicators are not quite as scary. The monthly payroll data have indicated positive job growth for four consecutive months now. The household survey data are indicating an even stronger return of job creation, although one third of those new jobs are part-time. Indeed, we expect the May jobs report that is to be released next week will reveal even more job gains than in April, though much of the strength will likely be from temporary census hiring.

We also got confirmation that despite Herculean efforts to support the housing market through homebuyer tax credits, mortgage modifications and record low mortgage rates, the ability to stabilize home prices at current levels appears fragile. The Office of Federal Housing Enterprise Oversight (OFHEO) released its monthly purchase-only home price index report for March, showing an increase of 0.3 percent from February after a string of three consecutive monthly declines. However, this home price index is still down 1.9 percent from a year ago. By contrast, the seasonally-adjusted national Case-Shiller index revealed renewed weakness in home prices in the first quarter. The Case-Shiller index plunged at an annualized 5.05 percent rate in the first quarter, even though the year-over-year figure improved to a 2.13 percent home price gain. In the wake of the homebuyers’ tax credit expiration and the rise in the U.S. foreclosure rate, further declines in national home prices can be expected. (more…)

Highlights

• Risk sentiment and markets stabilizing; rebound potential
• Spanish downgrade latest threat to EUR
• Easing of tensions bodes well for the EUR
• EUR/GBP still sitting above key support

(N.B.: Monday May 31 is a holiday in the UK and US. Market liquidity is likely to be lower and volatility may be higher as a consequence.)

Risk sentiment and markets stabilizing; rebound potential

Global stock markets appeared to stabilize in the past week on signs that the recent sell-off was extreme and that the global recovery was continuing. The MSCI World index managed to rebound slightly after falling to new lows for the decline, generating a sizeable ‘hammer’ pattern on weekly candlestick charts, a potential bullish reversal indicator. The S&P 500 also saw a sharp rebound from the significant 1040/45 level, potentially putting in a key price low. Other risk assets recovered more convincingly, such as the CRB commodity index, which held the prior week’s lows and closed up about 1.5%. US Treasury yields also gained on the week in another sign that demand for safe haven assets was beginning to ebb. In currencies, the JPY-crosses (e.g. AUD/JPY, CAD/JPY) mostly held above recent lows and posted gains for the week, the exception being EUR/JPY. Gold prices also saw some bounce after a week of vicious liquidations and regained the $1200 level.

We think there is further potential for risk assets to recover in coming weeks, though there are certainly many different headwinds. Overall, the credit crisis in Europe appears to be receding, with some slight declines toward the end of the week in sovereign debt credit default swaps (CDS), a measure of the risk of default. To be sure, concerns over the health of European private sector banks remain, and this is the most likely source of further risk aversion in the near-term. But as long as credit markets continue to calm down, investors desperate for returns are most likely to return and buoy risk assets. We think it’s significant that Chinese officials immediately squelched speculation they were abandoning Europe and suggests intense global coordination to stem the latest financial sector crisis. Also, as a contrarian indicator, investors holding bearish outlooks over the next six months outnumbered bullish views by 21%, the highest split since Nov. 2009. We would also look at the likely capitulation of two weeks ago as significant turning point. In currencies, we would look for opportunities to buy JPY-crosses on weakness and remain diligent in protecting and taking profits on gains in light of the many potential potholes out there. (more…)

Sunrise Market Commentary

• Global bonds hammered, as risk appetite returns pushing equities sharply higher
  Yesterday’s trading was dominated by a return of risk appetite. As usual, the turnaround was much more violent in the US bond markets than in EMU with US yields higher by up to 18 basis points while German yields limited the rise to 6 basis points. The re-steepening of the curve in the US was pronounced, but less so in Germany.
• EUR tries to move away from the lows
  Yesterday, the euro profited from a rebound in global risk appetite, even as the link between EUR/USD and the equity markets was not one-to-one. Nevertheless, a retest of the lows was again rejected, suggesting that there is still room for a technical rebound. Sterling was supported by rumours on the Prudential/AIA deal.

The Sunrise Headlines

• US equities storm ahead, as investors’ concerns about the funding and debt crisis ease, making them again more optimistic on the growth outlook. S&P rose by 3.3%, led by the cyclicals (financials, energy and materials). Asian equities rallied moderately overnight for the third day in a row.
• Japanese consumer prices marked their 14th month of annual declines in April, but if one excludes the effect of the scrapping of school tuition fees the outlook may not be so bad. Strong April retail sales support that assessment.
• Commodities rebound, as waning risk aversion suggests global growth might stay strong. Oil extends gains and reaches two-week high above $75/barrel.
• Spanish parliament approves by one vote the austerity measures, but the razorthin majority raises the prospect of early elections.
• US CP statistics show the decline in outstanding amounts slowed in recent week, but the foreign financial CP continues to decline, suggesting US funds are diminishing exposure on European banks.
• Prudential shares halted in HK trading, as AIA renegotiations on the price tag restarted. Rumours affected sterling trading yesterday.
• In the UK, GfK consumer confidence declined for the third month in a row.
• Today, attention focuses on the release of US Chicago PMI, the Swiss KOF sentiments survey and Swedish GDP. The Italian BTP auction will get a lot of attention in the European debt markets. (more…)

EUR/USD

Current level – 1.2350

EUR/USD is in a downtrend, after peaking at 1.5146 (Nov.25,2009). Technical indicators are descending, and trading is situated below the 50- and 200-Day SMA, currently projected at 1.3458 and 1.4206.

A minor consolidation unfolds below yesterday’s high at 1.2393 and it precedes further appreciation towards 1.2440, en route to 1.2603. Crucial on the downside is 1.2202.

Profit-taking affects gold curbing silver and platinum

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EUR/GBP

Current level – 0.847

Longer term bias is neutral for the pair. Trading in a wide range between 0.8450 and 0.8750 area.

Intraday:  holding above key support zone between 0.8420/50.  Watch for a break below support area between 0.8450 and 0.8400 figure.

Profit-taking affects gold curbing silver and platinum

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After Japanese inflation data overnight, today’s economic data calendar is primarily focused on the US. April personal income and spending figures are published alongside the latest ‘core’ PCE deflator and the Chicago PMI and Michigan surveys for May. Following yesterday’s slightly weaker-than-expected outturn for the second estimate of Q1 GDP, we look for a +0.3% m/m outturn on US personal spending in April, giving some uplift into Q2. Consumer spending has performed quite well recently, although a still low saving ratio (currently at 2.7%) means that the scope for strong gains looking further ahead could be limited. Meanwhile, our forecast for May’s Chicago PMI index stands at 62.8 compared with 63.8 in April. This survey has continued to trend upwards this year following the significant headway made in 2009. However, we expect a pause for breath on concerns about the durability of the global economic recovery during the current period of financial market volatility.

Chart: US personal consumption is performing well, though additional headway could be difficult to achieve going forward