European Market Update: Greece makes required coupon payment due today; German ZEW survey mixed as main risks are already discounted

Economic Data

- (JP) Japan July Final Leading Index CI: 104.6 v 106.0 prelim; Coincident Index CI: 107.1 v 109.0 prelim

- (JP) Japan Aug Nationwide Department Sales Y/Y: -1.7 v -0.1% prior; Tokyo Department Store Sales Y/Y: -2.9% v -1.3% prior

- (FI) Finland Aug Unemployment Rate: 6.6% v 6.8%e

- (GE) Germany Aug Producer Prices M/M: -0.3% v 0.0%e; Y/Y: 5.5% v 5.8%e

- (SZ) Swiss Aug Trade Balance (CHF): 810M v 2.8B prior; Real Exports M/M: -7.0% v +1.4% prior; Real Imports M/M: +0.9% v -0.1% prior

- (JP) Japan Aug Convenience Store Sales Y/Y: 7.9% v 9.5% prior

- (SA) South Africa July Leading Indicator: 134.3 v 135.5 prior

- (EU) ECB: €1.0B borrowed in overnight loan facility v €1.2B prior; €144.8B parked in deposit facility v €111.5B prior

- (HK) Hong Kong Aug Unemployment Rate: 3.2% v 3.5%e

- (NV) Netherlands Sept Consumer Confidence: -30 v -23e

- (SW) Sweden Q2 Final GDP Q/Q: 0.9% v 0.9%e; Y/Y: 4.9% v 5.1%e

- (TT) Taiwan Aug Export Orders Y/Y: 5.3% v 7.0%e

- (IT) Italy July Industrial Orders M/M: +1.8% v -1.5%e; Y/Y: 6.5% v 8.3%e

- (IT) Italy July Industrial Sales M/M: +1.6% v -1.6% prior; Y/Y: 7.7% v 3.1% prior

- (GE) Euro Zone Sept ZEW Economic Sentiment: -44.6 v -40.0 prior

- (GE) Germany Sept ZEW Survey Economic Sentiment: -43.3 v -45.0e; Current Situation: 43.6 v 45.0e

- (SA) South Africa Q2 Non-Farm Payrolls Q/Q: No est v 0.6% prior; Y/Y: No est v 2.6% prior

Fixed income:

- (SP) Spain Debt Agency (Tesoro) sold €4.46B vs. €3.5-4.5B Indicated Range in 12-month and 18-month Bills

- Sold €3.59B in 12-month Bills; Avg Yield 3.591% v 3.335% prior; Bid-to-cover: 2.80x v 2.14x prior; Max Yield 3.648% v 3.40% prior

- Sold €870M in 18-month Bills; Avg Yield 3.807% v 3.592% prior; Bid-to-cover: 2.70x v 3.23x prior; Max Yield 3.900% v 3.65% prior

- (DE) Denmark sold approx DKK14.4B in 2014 and 2018 bonds

- (EU) ECB allotted €201.1B vs. €165Be in 7-Day Main Refinancing Tender

- (HU) Hungary Debt Agency (AKK) sold HUF50B in 3-Month Bills, Avg Yield 5.94% v 5.69% prior


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Notes/Observations:

- Greece may hold a voter referendum on whether to address its fiscal crisis while staying in the EMU or pulling out of the single currency

- S&P cuts Italy's sovereign rating 1 notch; Core Europe on the radar???

- EU does not recognize China's market economy status. China banks cut swap lines with EU banks. Probably just a coincidence

- Greece said to have fully paid €769M in coupons due today

- German ZEW survey was mixed

- Italy Industrial data better but with downward revisions

Equities:

FTSE 100 +1.1% at 5315, DAX +2% at 5521, CAC 40 +0.80% at 2962, IBEX 35 +0.60% at 8271, FTSE MIB +0.90% at 14,215, SMI +0.60% at 5390

- After opening in negative territory, European shares recovered their earlier losses led by utilities. European debt crisis continue to weigh in the markets after S&P downgraded Italy's sovereign rating by one notch to A. Banks continued to be the worst performers. Financial press reported that one of China's state banks had suspended FX swaps with UBS, SocGen, Credit Agricole, and BNP Paribas, due to concerns over euro's safety. Furthermore FT reported that Siemens withdrew €500M from a large French bank two weeks ago but the company stated that the withdrawal was not due to the health of the bank.

- German utilities RWE [RWE.GE] and E.ON [EOAN.GE] rallied both over 3% after a German court suspended the nuclear fuel tax. SAP [SAP.GE] also rallied at the European opening. After the EU close yesterday, it was reported that US federal court had asked Oracle to revise its request seeking a review of a prior court order overturning the $1.3B damage award against SAP. On Sept 1st a judge ruled prior verdict against SAP in the amount of $1.3B was 'excessive'. The judge saw actual damages close to approximately $270M

Speakers:

- Italy Gov't commented on S&P sovereign downgrade and believed move was influenced by political motives. The gov't noted that Italy had already implemented measures to balance budget and would shortly approve measures to spur growth and can meet its 2013 deficit target

- Fitch issued a report that noted a 'Third way' for the Euro Zone could provide a medium-term solution to the crisis. As reflected in its ratings, Fitch expected Greece to default but not to leave the Euro zone as concerns over the risk of a break-up of the Eurozone were greatly exaggerated.

- Greek Govt spokesperson denied press speculation that it was considering an EU referendum whether to address its fiscal crisis while staying in the EMU or pulling out of the single currency.

- Japan PM Noda reiterated that the country was open to purchase additional EFSF bonds. The PM also noted that there was no change in policy to take decisive measures against excessive currency moves

- US Ambassador to China Locke reiterated view that a faster yuan currency appreciation would help China fight inflation and that most economists saw the yuan as under valued He noted that the Global economy had yet to return to full strength and that a strong, prosperous China would benefit the global economy. Locke called for a more open environment for investment in China and stronger protection of intellectual property rights. Lastly the ambassador targeted to increase Chinese investment in the US

- Denmark Central Bank Gov Bernstein: Situation in the financial markets at the moment calls for caution on fiscal policy

- Swiss SECO Sept Economic update lowered 2011 and 2012 GDP growth forecast as economic outlook has deteriorated. Biggest threat to Switzerland was the EU sovereign crisis and the turbulence in the financial markets. Negative export to sharply slow growth with some quarterly contraction possible but a deep recession was unlikely. The Swiss Gov't reiterated view that CHF currency was 'very highly valued' and the risk of inflation in 2012 was low

- ECB chief Trichet stated in the Spanish press that the recent agreement on USD Repo lines showed close cooperation among central banks

- China Foreign Ministry reiterates confidence in Europe's economy and added that EU should prioritize reaching a consensus on bailout measures. China also hoped that Europe secures Chinese investments in the region

- Spain Fin Min Salgado commented that its economy was slowly recovering and hoped Moody's took into account the country's reforms. She reiterated that Spain data showed country was on track to meet deficit targets. She also commented on other European matters such as that Greece must implement structural reforms and that bankruptcy was not an option. The EU corporate tax should be more harmonized and that the ECB was trying to keep bond prices at reasonable level.

- Swiss Econ Min Schneider-Ammann: Reiterates view that Gov't supports SNB policy

- Sweden Central bank (Riksbank) Minutes from Sept 7th noted that the Swedish economic slowdown was more visible than in July and that global growth prospects had show deterioration. There was considerable uncertainty over economic developments

- OPEC's Sec El-Badri commented that an oil price at $75 was 'not fine' and would discuss production at its Dec meeting if Libya continued to produce. OPEC's forward cover was now at 58 days and around 5-6 days above its 5-yr avg. OPEC was very concerned about the EU debt crisis.

- ZEW Economists commented that the EU debt crisis and global economic slowdown might have caused economic expectations to weaken but that the downtrend was losing momentum this month. There was a high level of insecurity regarding economic outlook. There had been a significant drop in inflation and ECB interest rate and most analysts expected ECB to hold rates steady for the next six-months

Currencies/Fixed income:

- The European morning was cautious at the start of trading following the lingering concerns of the debt crisis. S&P did cut Italy's sovereign rating one notch to "A" during the Asian session while Greece stated that it would again hold another conference call with the EU/IMF/ECB Troika later today. There were also renewed jitters of banking sector concerns following press reports that German industrial giant Seimens removed funds from a French bank while Chinese State banks swap lines appeared full with several European counterparts. However, soothing comments from gov't and corporate officials help to deflect the initial wave of risk aversion.

- The EUR/USD was probing the lower end of the 1.36 handle as the session began but dealers did caution that 1.3570 appeared to have some solid support. The market appeared to become a bit overleveraged near the session lows and the Euro found the momentum to shake out the weak short sentiment. Apparently - Siemens withdrawal of funds were more related to performance rather than concerns over France's financial 'health'. Also aiding the Euro were comments that Greece was not considering any referendum on the Euro. Lastly the ECB was said to have been again buying peripheral debt, particularly Italian and Spanish maturities. The EUR/USD managed to recover its initial losses and probe above the 1.37 area.

- The JPY was little changed during the session but was initially firmer on risk aversion flows. The JPY was a bit softer just ahead of the NY morning after Japan PM Noda reiterated that the country was open to purchases of additional EFSF bonds and there was no change in policy to take decisive measures against excessive fx moves

Political/ In the Papers:

- The Telegraph summarized analysts' comments regarding S&P's downgrade of Italy. Nomura economist Stephen Roberts said the move adds to the contagion risk in markets and has encouraged demand for safe haven assets.
High-Frequency Economics chief economist Carl Weinberg said the downgrade was expected; expects to move to lead to a rise in the bond yields for Italy and other peripheral EU countries, which could weigh on the Euro. Dennis Gartman said the downgrade is not Euro supportive, but was expected by the market.

- The Irish July mortgage arrears hit new highs of nearly 9%. According to credit agency Moody's, arrears of 90 days or more increased 8.78% in July from 7.62% in April. The agency sees more arrears due to an increase in unemployment. It also forecasts unemployed will rise to 14.5% v 13.6% prior year. The number in arrears of 360 days or more in July increased 2.86% from 2.38%. There are approximately 777,000 residential mortgages valued at about €115 billion.


Looking Ahead

- (GR) Greece Debt Agency (PDMA) to sell €1.25B in 13-week Bills

- (IS) Israel Sept Inflation Forecast: o est v 2.5% prior

- (IS) Israel Aug Money Supply Y/Y: No est v 3.2% prior

- 6:00 (IR) Ireland Aug PPI M/M: No est v 0.0% prior; Y/Y: No est v -0.4% prior

- 6:00 (EU) EU Trade Min De Gucht

- 7:00 (FI) Finland's Parliament debates EFSF Amendments

- 7:00 (TU) Turkey Central Bank Interest Rate Decision: Expected to leave the Benchmark Repo Rate unchanged at 5.75% prior

- 7:00 (EU) ECB drains € vs. €152.5B Targeted in 7-Day Term Deposits

- 7:15 (BE) Belgium's Leterme speaks at Brussels Think Tank

- 7:45 (US) ICSC Weekly Chain Store Sales

- 8:00 (HU) Hungary Central Bank Interest Rate Decision: Expected to leave the Base Rate unchanged at 6.00%

- 8:00 (PD) Poland Aug Core Inflation M/M: 0.1%e v 0.1% prior; Y/Y: 2.4%e v 2.4% prior

- 8:30 (CA) Canada Aug Leading Indicators M/M: 0.2%e v 0.2% prior

- 8:30 (CA) Canada July Wholesale Sales M/M: 0.8%e v 0.2% prior

- 8:30 (US) Aug Housing Starts: 590Ke v 604K prior; Building Permits: 590Ke v 601K prior (revised from 597K)

- 8:55 (US) Weekly US Redbook Retail Sales

- 9:00 (BE) Belgium Sept Consumer Confidence: No est v -9 prior

- 10:00 MX 250) Central Bank Announces International Reserves for Prev. Week

- 11:30 (CA) Bank of Canada Gov. Carney speaks in Saint John, New Brunswick

- 11:30 (US) Treasury to sell 4-Week Bills

- 11:30 (US) Treasury to sell $25B in 52-Week Bills

- 13:00 (GR) Second day of schedule Greek-Troika conference call

- 13:00 (GE) German Chancellor Merkel and Roettgen Take Part in Panel on sustainable economic growth

- 16:30 (US) Weekly API Energy Inventories