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European Market Update

European Market Update

Thu, Apr 24 2008, 09:55 GMT
by John J. Phillips IV

TradeTheNews.com

ECONOMIC DATA

• FR Apr Business Confidence Indicator: 106 v 108e || Prior revised from 109 to 108
• FR Apr Production Outlook Indicator: -9 v –13e || Prior revised from –11 to –5
• FR Apr Own-Company Production Outlook: 13 v 12e || Prior revised from 14 to 15
• SP Mar Producer Prices: M/M 0.9% v 0.7%e || Y/Y 6.9% v 6.7%e
• IT Apr Consumer Confidence Indicator: 99.8 v 99.6e
• SW Mar PPI: M/M –0.1% v 0.5%e || Y/Y 3.1% v 3.7%e
• EU Feb Current Account: €4.3B v -€10.6B prior || Prior revised from -€10.6B tp -€7.9B
• EU Feb Current Account nsa: €5.0B v -€19.1B prior || Prior revised from -€19.1B to -€17.9B
• GE Apr IFO Business Climate: 102.4 v 104.3e
• GE Apr IFO Current Assessment: 108.4 v 111.0e
• GE Apr IFO Expectations: 96.8 v 98.0e
• UK Mar Retail Sales: -0.4% v –0.3%e || Prior revised from 1.0% to 1.1% |||| Y/Y 4.6% v 4.3%e || Prior revised from 5.5% to 6.3%

SPEAKERS/FIXED INCOME/COMMODITIES/FX/ERRATUM

• Amongst a slew of European earnings reports from a series of notables overnight the following is a non-exhaustive summary of stand out reports. German drug-maker Bayer (BAY) reported first-quarter results overnight. Revenues were in line with expectations, while net income came in at €762M, exceeding estimates of €659M. Bayer reiterated its FY08 revenue growth forecast of 5% ex-currencies.  Credit Suisse (CS) posted a first-quarter net loss of CHF2.14B overnight. Additionally Credit Suisse announced CHF5.3B in writedowns on leveraged finance and structured products. The company’s CEO later said that it would be hard to predict further writedowns. Persimmon [PSN.UK] reported year-to-date revenues of £1.37B overnight, down from £1.8B a year ago. The company noted that cancellations have accelerated, and reported yead-to-date volumes down 18%.
• In the newspapers overnight the Wall Street Journal wrote that the head of Siemen's (SI) medical equipment unit plans to leave the company. The departure follows new evidence of misconduct at the business. The Wall Street Journal reported overnight that Wendy’s (WEN) has reached a transaction pact with investor Nelson Peltz, however details were said to be unavailable at this time.  The Independent wrote overnight that more jobs are expected to go at UBS (UBS) as invested vent their frustration. Deutsche Bank (DB) is planning to sell billions of dollars of European leveraged loans the Financial Times wrote overnight. The article notes that the deal is expected to be announced along with the banks earnings release next week, and speculated that this would be the 3rd large sale of leveraged loans by a bank this month.
• In energy news overnight, according to wire reports overnight the regional Vice President of Aramco says that the rising crude prices are not mainly driven by Chinese demand. ENI’s (E) Norwegian unit announced that it made a gas discovery at the North Sea, Kvitebjoern gas field overnight, and said that it will analyze well test results before deciding whether or not to move ahead with development. According to wire reports overnight, workers at one of Exxon’s (XOM) Nigerian facilities comments a partial strike overnight. The spokesperson said that production has not been affected by the partial strike. An Ineos spokesperson said overnight that it is a long way through refinery shutdown process, but noted that the Grangemouth refinery shutdown to be completed on Saturday.  Russian paper Vedomosti wrote overnight that Gazprom [GAZP.RU] plans to buy control of its TNK-BP with British Petroleum (BP) for $20B by the end of 2008. Ahead of the market open source reports indicated that Gazprom is not in fact in talks to acquire BP’s share of the joint venture. The Wall Street Journal wrote overnight that according to recently released data, Iraq's government will receive a larger than expected windfall for 2008, which may total as much as $70B. In The Independent famed economic journalist Hamish McRae wrote that a permanently high oil price might not be a bad thing if it forces conservation. McRae argues that the advantage of current prices is that they force conservation. Previous oil price shocks, he said, had a temporary effect: the world cut oil use but then forgot about conservation when the price came back down. You should say that what we need is a permanently high oil price, McRae argues, so that after this shock we do not return to our bad old ways. McRae said that he sees this happening, and notes that it is reasonable to expect some reaction in the next few months.
• In new supply overnight Japan sold ¥1.56T in 2-year notes with an average yield of 0.712% and a bid-to-cover of 3.10x. The cover compares to the 2.82x seen at the previous auction.  Italy sold €3.5B in 2010 zero-coupon bonds with an average yield of 4.099% and a bid-to-cover of 1.29x. Over in the UK the DMO sold £675Min 0.75% index-linked 2047 gilts, with an average yield of 0.719% and a bid-to-cover of 2.28x. The cover compares to the 2.06x seen at the previous auction. Elsewhere, China's sovereign wealth fund, according to the Financial Times, has as much as $90B to spend on assets abroad, +30% vs. the original allocation.
• There was a lot to be said by central bank officials overnight. Starting in Asia, the Royal Bank of New Zealand’s Bollard said following the central bank’s rate decision that New Zealand’s rates needs to be at 8.25% for some time. Bollard said that he sees upside risks to inflation, adding that the NZD is persistently strong. According to the South China Morning Post, the People’s Bank of China Governor Zhou said that further monetary tightening is needed, adding that the PBoC would step up measures to cope with economic uncertainties at home and abroad. Moving on to Europe,  The OECD's Gurria said overnight that the drop in the US economy is seen lasting longer than previously expected, noting that he sees a slight pick-up in 2009. Following the release of the April IFO data, IFO economist Abberger said that negative forces from the high Euro, elevated oil prices, and the financial crisis are starting to have an effect on the real economy. Abberger asserted that the ECB should keep interest rates steady despite high inflation rates. IFO economist Nerb said following the data release that the German economy will continue to do well in coming months, adding that he hardly sees hardly any room for ECB to cut interest rates. Nerb forecasted 2008 German GDP growth of 1.8%, which is in line with recent government forecasts, and added that Euro overvaluation may continue for some time.  Maltan ECB representative Bonello departed slightly from the ECB’s recent hawkish rhetoric overnight saying that it is difficult to make case for higher interest rates. Bonello added that he does not thing that any of the ECB members are thinking of higher interest rates, and asserted that current interest rates will contribute to meeting medium term inflation target.  Bonello said that there is a risk that higher inflation limits monetary policy’s ability to address growth concerns. In line with other ECB member’s comments Bonello said that there is a risk that international commodity prices, including oil will not come down. Bank of England executive director Jenkinson said overnight that the liquidity crisis can be very hard to stop, noting that he sees some signs slower lending starting to have significant impact on economy.  Finally, the EU's Juncker said that he would not like global FX reserve holders to shift currencies, adding that the status quo is good. Junker reiterated that he does not like excessive FX volatility and sharp moves.
• On the data front, German IFO data was in the spotlight today as all three components posted declines and fell below expectations, with the headline business climate reading declining to its lowest level since January of 2006. The data added significant upside momentum to the European fixed-income futures, as did some of the comments hailing from IFO economists following the data release. Elsewhere, March retail sales in the UK capped all upside momentum in the gilts, which were moving in conjunction with the bunds after the IFO data. The y/y retail sales reading exceeded estimates of 4.3% coming in at 4.6%, but focus fell on the back-month y/y reading, which was revised up to 6.3% from 5.5% making it the second highest reading since September of 2004. There wasn’t anything too notable anywhere else in terms of European data, however I’ll point out that French sentiment figures were mixed for April, while Spanish producer prices were slightly ahead of expectations for March.  In Asia overnight the Royal Bank of New Zealand left interest rates unchanged at 8.25% as expected, while the Philippine central bank held rates at 5.00%, also as expected.
• In currencies, the EUR/USD retreated following the German IFO data, which came in below consensus. Dealers took note of the comments from IFO's Abberger who noted that the negative forces from high Euro currency rate and oil prices are starting to have an effect on real economy. The EUR/USD was approaching the 1.57-level during the mid-European morning, and is now off 300 pips from its all-time highs set on April 22nd. Verbal intervention has recently capped the upside momentum in the Euro over the last 48 hours. The Euro was vulnerable heading into the IFO after comments from ECB member Bonello. His comments have deviated from other members of the ECB.  The GBP was mixed against the major currencies. The GBP was firmer against the Euro as the EUR/GBP cross tested the 0.7965-area. The GBP was aided by some upward revisions to its retail sales data.
• Looking ahead, March durable goods data is due out in the US at 8:30 ET, along with initial jobless claims, and will be followed at 10:00 ET by the release of March new home sales, and the March help wanted index. In new supply the Treasury is due to sell $19B in 5-year notes. In central bank speak the ECB’s Weber and Trichet are both due to speak in Frankfurt at 8:30 ET, while the Fed’s general counsel Alvarez is due to testify on sovereign wealth funds.  Earnings are heavy today, and creating a exhaustive list of expected notable would simply make my fingers bleed. With that in mind, the following companies with revenues in the $5+ billion range are due in the pre-market this morning: Aetna Incorporated (AET), Astrazeneca (AZN), Bunge Limited (BG), Dow Chemical Company (DOW), Ford Motor Corp (F), 3M (MMM), Motorola (MOT), Northorp Grumman Corp (NOC), Raytheon (RTN), and Safeway (SWY).
• Conculsion: The German sentiment data seems to indicate the perhaps the Euro-Zone’s growth engine is starting to feel the pressure of a combination of different elements including the elevated Euro level, and the overall slowing of the global economic environment. Despite the decline, the IFO data still remains within range of its recent highs; continued declines in the coming months would point to declining German economic growth. The elevated retail sales results in the UK seem to compliment comments form the ECB’s Besley who pointed out a few days ago that inflation expectations are likely to remain high for sometime, adding that the mortgage-swap scheme allows the Bank of England to remain focused on its CPI target. While a rate hike isn’t in the cards at the moment, for the time being further BOE rate cuts are off of the table as well. Comments from the ECB’s Bonello stood out overnight. It’s unclear if Bonello has actually heard the rest of his colleagues speak over the past few months, or if he knows something that the rest of us do not, but I’ll point out once again that Bonello said that he does not think that anyone at the ECB is thinking of a rate hike at the moment. While that may be true, the recent hawkish tone seen from the ECB seems to lean more towards a rate hike than anything else. Despite this Bonello’s comments added some upside momentum in the fixed income market. I wonder what Trichet and Weber say in Frankfurt later today.

Published on  Thu, Apr 24 2008, 09:56 GMT

Archive

• European Market Update
  Published On Thu, Apr 24 2008, 09:55 GMT
• European Market Update
  Published On Tue, Apr 22 2008, 09:35 GMT
• European Market Update
  Published On Mon, Apr 21 2008, 09:15 GMT
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  Published On Fri, Apr 18 2008, 09:45 GMT
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