Q2 UK GDP data shows BoE could afford to lay the ground for rate hikes ahead

Notes/Observations

- Asian equity markets have stabilized overnight but intraday volatility remains high; risk appetite remains fragile for now

- UK Q2 Advance GDP data in line with expectations (QoQ: 0.7% and YoY 2.6%); data aided by mining and quarrying being at highest since Q3 1989; suggests BoE can afford to lay the ground for rate hikes ahead

Economic data

- (SE) Sweden Jun Retail Sales (miss) M/M: 0.3% v 0.7%e; Y/Y: 3.8% v 4.0%e

- (IT) Italy July Consumer Confidence Index (miss): 106.5 v 109.0e; Business Confidence: 103.6 v 103.7e

- (UK) Q2 Advance GDP (in line) Q/Q: 0.7% v 0.7%e; Y/Y: 2.6% v 2.6%e

Fixed Income Issuance:

- (NL) Netherlands Debt Agency (DSTA) sold €1.865B vs. €1.5-2.5B indicated range in 0.25% Jan 2020 DSL; Avg Yield: +0.066% v +0.073% prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

**Equities**

Indices [Stoxx50 +1%, FTSE 100 +0.8% at 6,555, DAX +1% at 11,163, CAC-40 +0.9% at 4,971, IBEX-35 +1.1% at 11,269, FTSE MIB +1.6% at 23,178, SMI +0.5% at 9,237, Athens Stock Exchange closed, S&P 500 Futures +0.5% at 2,075]

- Market Focal Points/Key Themes: European equity markets open slightly higher following sharp losses on Monday; Shanghai ends lower by 1.7%; Energy earnings (BP misses estimates, Statoil beats ests); Michelin's H1 profits miss ests; German engine maker Man warns on outlook; LVMH to report after the close; US morning earnings (Cummins, Dupont, Ford, Corning, Merck, Pfizer, UPS)

By Sector:

- Energy [Statoil STL.NO +2.5% (Q2 profits above ests)]

- Industrials [Imtech IM.NL -10% (profit warning), Michelin ML.FR -6% (H1 profits below ests), Sulzer SUN.CH -1% (cautious outlook); Melrose MRO.UK +12% (asset sale), Gerresheimer GXI.DE +10% (acquisition), GKN GKN.UK +5% (H1 profits rose)]

- Healthcare [UCB UCB.BE -5% (data presentation); Hikma Pharmaceuticals HIK.UK +5% (acquisition)]

- Telecom [Orange ORA.FR +1% (Q2 results above ests)]

- Technology [Aixtron AIXA.DE +1% (reaffirmed outlook)]

- Utilities [Endesa ELE.ES +2% (H1 EBITDA above ests)]

- Consumer Discretionary [ITV ITV.UK +2% (H1 profits rose), Luxottica LUX.IT +2% (Q2 profits rose, reaffirmed outlook)] Financials [RSA RSA.UK +10% (takeover approach from Zurich)]

**Speakers**

- UK appoints Gertjan Vleighe to BOE MPC; effective Sept 1st (replaces David Miles)

- Bank of Spain (BOS) Monthly Bulletin: Private consumption remained dynamic at end Q2

- Bank of Korea (BOK) July Minutes: Decision was unanimous to keep policy steady. Flexibility needed to counter rise in bond yields. One member: Need to monitor effects of rate cuts

- Indonesia Energy Min: Considering reviewing fuel prices every six months

**Currencies***

- The USD was slightly firmer in quiet trading on Tuesday. Yesterday saw participants price more of a risk that Fed tightening cycle could be knocked off course by the worsening global backdrop

- The GBP moved off session lows after UK Q2 advance GDP came in as expected. The data suggested that BoE could afford to lay the ground for rate hikes ahead. GBP/USD at 1.5575 ahead of the NY morning. Analyst now believe that first MPC members to start voting for a hike as soon as August

- EUR/CHF has moved sharply higher despite weak risk appetite. Analyst note that negative domestic bond yields, convincing Swiss-based funds to place investments into foreign bond markets

**Fixed Income:

- Bund futures trade at 153.32 down 58 ticks on the day gaping down from yesterdays close. Analysts look for a break of today's high at 153.88 targeting 154.09 to fill today's gap with a break of this seeing a fresh run on July 8th 154.24 high, which also corresponds with the 50% retracement of the April June fall followed by an extension to 155.44. Downside support moves to 153.02 after this mornings break of 153.35, with 152.50 the next potential target.

- Today saw Netherlands sell €1.87B in its 4y DSL the equivalent of 7K bund or 15K bobl futures. Later today Italy will tap its 11y BTPei for €0.50-0.75B the equivalent to 3K Bunds.

- UK Gilt futures trades 116.35 down 53 ticks on the day, as in line UK advanced GDP readings underpinned the downward move seen since the morning. Analysts now look for the gap fill at 116.77 followed by resistance at 117.17 then 117.32. A break above would would target 117.72, the medium term downtrend. To the downside the break of 116.35 targets Fridays gap support at 116.25. Below this sees 115.77 next.

- Tuesday's liquidity report showed Monday's excess liquidity jumped to €409.7B a rise of €19.1B from €390.6B prior. This was due to a fall of €19.1B in AFs and MonPol portfolios to €19.8B. Use of the marginal lending facility fell to €310M from €329M prior.

- Corporate Issuance is likely to be lighter this week, with BofA coming to market issuing $2.5B 10y notes yesterday and Intel announcing today it is selling a 30y USD denominated bond in Taiwan, accounting for the bulk of the issuance so far this week. Looking forward this week could see issuance out of HSBC. Analysts expecting $20-25B of corporate issuance this week.

**Political/In the Papers:

- (EU) IMF: ECB may need to extend QE beyond September 2016, should boost QE if Greece pushes up sovereign yields; Eurozone inflation to pick up in 2016 but should remain below the ECB's target rate through 2020

- (CN) China's stock market regulator (CSRC) indicates that the China Securities Finance Corp (CSFC) has not left the stock market and China will continue to stabilize the stock market and sentiment

- (CN) PBoC to inject CNY50B in 7-day reverse repos (10th consecutive injection)

Looking Ahead

All times listed for economic events are denominated in Eastern Standard Time (Add 4 hours for GMT equivalent)

- (IT) Italy Debt Agency (Tesoro)to sell 3.10% Sept I/L 2026 BTPei bond

- (ES) Spain Jun YTD Budget Balance: No est v -€22.0B prior

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 3-month Bills

- 05:30 (ZA) South Africa to sell 2030, 2035, 2037 and 2044 bonds

- 06:00 (IE) Ireland Jun Retail Sales Volume M/M: No est v -2.5% prior; Y/Y: No est v 7.4% prior

- 06:45 (US) Daily Libor Fixin

- 07:00 (BR) Brazil July FGV Construction Costs M/M: 0.7%e v 1.9% prior

- 07:00 (RU) Russia announces weekly OFZ bond auction

- 07:45 (US) Chain Store Sales

- 08:15 (US) Baltic Dry Bulk Index

- 08:30 (CA) Canada Jun Industrial Product Price M/M: 0.4%e v 0.5% prior; Raw Materials Price Index M/M: 1.0%e v 4.4% prior

- 08:55 (US) Weekly Redbook Sales

- 09:00 (US) May S&P/ CaseShiller 20 City M/M: 0.30%e v 0.30% prior; Y/Y: 5.60%e%e v 4.91% prior; House Price Index: 180.34e v 177.01 prior

- 09:00 (US) May S&P/ CaseShiller M/M: +0.10%e v -0.02% prior; Y/Y: 4.50%e v 4.23% prior; House Price Index: No est v 170.01 prior

- 09:00 (EU) Weekly ECB Forex Reserves

- 09:30 (US) Senate Bank Committee hearing on oil export ban

- 09:45 (US) July Preliminary Markit Services PMI: 55.0e v 54.8 prior; Composite PMI: No est v 54.6 prior

- 10:00 (US) July Consumer Confidence Index: 100.0e v 101.4 prior

- 10:00 (US) July Richmond Fed Manufacturing Index: 6e v 6 prior

- 10:00 (MX) Mexico Weekly International Reserves

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

- 13:00 (US) Treasury to sell $26.0B in 2-Year Notes

- 16:30 (US) Weekly API Oil Inventories

- 16:30 (NZ) RBNZ member McDermott (not public)

- 19:50 (JP) Japan Jun Retail Sales M/M: -0.9%e v +1.7% prior; Y/Y: 1.0%e v 3.0% prior; Large Retailers' Sales: 1.4%e v 5.3% prior

- 23:00 (CN) China to sell 3-Year Bonds