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European Market Update

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German Retail Sales Slow; Euro−Zone CPI Estimate Hits All Time High

Fri, May 30 2008, 13:39 GMT
by John J. Phillips IV

TradeTheNews.com

ECONOMIC DATA

• ·UK May GFK Consumer Confidence: -29 v -25e
• ·GE Apr Retail Sales: M/M -1.7% v 0.6%e || Prior revised from -1.9% to -2.2% |||| Y/Y -1.0% v -2.0%e || Prior revised from-6.3% to -6.8%
• ·FR Apr Producer Prices: M/M 0.7% v 0.6%e || Prior revised from 0.5% to 0.6% |||| Y/Y 5.4% v 5.1%e || Prior revised from 5.2% to 5.3%
• ·SW Q1 GDP: Q/Q 0.4% v 0.7%e || Prior revised from 0.8% to 0.7% |||| Y/Y 2.2% v 2.7%e || Prior revised from 2.8% to 2.9%
• ·SW Q1 Current Account [sek]: 81.1B v 80.2B prior || Prior revised from 80.2B to 76.3B
• ·SP Mar Current Account: -€12.0B v -€8.6Be
• ·IT Apr PPI: M/M 0.4% v 0.7%e || Prior revised from 0.8% to 1.0% |||| Y/Y 6.3% v 6.5%e || Prior revised from 6.3% to 6.4%
• ·IT May Preliminary CPI: M/M 0.5% v 0.3%e || Y/Y 3.6% v 3. 3%e
• ·IT May Preliminary CPI Harmonized: M/M 0.6% v 0.4%e || Y/Y 3.7% v 3.6%e
• ·EU May CPI Estimate: 3.6% v 3.5%e
• ·EU Apr Unemployment Rate: 7.1% v 7.1%e
• ·SZ May KOF Leading Indicator: 1.09 v 1.09e || Prior revised from 1.20 to 1.21

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

·In equity news overnight Blackbaud announced the acquisition of Kintera (KNTA) overnight for $1. 12/share for a total value of $46M. Barracuda Networks proposed to acquire Sourcefire (FIRE) for $7.50/share in cash

·In the newspapers, according to the Australian Financial Review BG [BG.UK] may offer A$15- A$16/share for Origin [ORG.AU] The Financial Times wrote overnight that talks between BP [BP.UK] and its Russian partners in TNK-BP [TNBP.RU]. The New York Times reported overnight that merger talks between United Airlines (UAUA) told U.S. Airways (LCC) have ended. The WSJ wrote that the CEO of UAL told US Air's CEO that the merger plan was suspended "for now". UAL's CEO said that he won't rule out a merger plan in the future.

·In energy news overnight the Canadian Finance Minister said in response to the call for G8 to act on oil prices that oil prices are set by global markets. Pemex said overnight that tests off of the Tabasco Coast were not conclusive. Pemex did note however that the tests showed 2.1B barrels of oil in fields, adding that the discovery may boost output to 650K in the medium term from the current 200K bpd. According to The National OPEC members plan to invest $160B to add about 5M bpd of oil output capacity by 2012. Petrobras (PBR) announced a light oil find in the shallow waters of Santos Basin at offshore block BM-S-40 overnight. The company expects the wells to produce 12K bpd. According to AFP, fishermen in Italy, Spain and Portugal were set to join Friday their French counterparts in protests over fuel prices, a day after French police removed demonstrators blockading oil depots.

·In fixed income news overnight Moody's said overnight that the outlook for UK banks is negative on the prospects of an economic downturn. Moody's said that most UK banks can weather downturn at current ratings, but noted that some rating adjustments on UK banks is possible in 2008. Moodys added that another 20% drop in housing prices in the UK would not hurt the capital reserves of UK banks and building societies, adding that that UK banks will deal with more credit-market writedowns, rising bad debts and a slowing economy for the next 12 to 18 months. Ambrose Evans- Pritchard wrote in the Telegraph overnight that “The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.” “The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.” "The steep rise in swap spreads this week is ominous," said John Hussman, head of the Hussman Funds. "The deterioration is in stark contrast to what investors have come to hope since March." “Willem Sels, a credit analyst at Dresdner Kleinwort, said the banks are beginning to face waves of defaults on credit cards, car loans, and now corporate loans. "We believe we're entering Phase II. The liquidity crisis has eased a little, but the real credit losses are accelerating. The worst is yet to come," he said.”

·In currency news overnight Ambrose Evans- Pritchard wrote in the Telegraph overnight that "Long-term private investors are pulling their money out of the Euro-zone at the fastest rate since the creation of the single currency, according to a report by the French bank BNP Paribas." "Foreign direct investment (FDI) in plant and factories has turned deeply negative, reaching minus €149bn (£117bn) over the past year. It dropped to minus €19bn in March alone as the soaring euro pushed labor costs in southern Europe to uncompetitive levels." "The euro is being held aloft by central banks in Asia, Russia, and the Middle East seeking an alternative to the dollar as a place to park their mushrooming currency reserves. In effect, the Euro-zone is now suffering from the reserve currency curse." "The Euro-zone racked up a record current account deficit of €15.3bn in March, seasonally adjusted. BNP Paribas said the so- called "PIGS" (Portugal, Italy, Greece, and Spain) are dragging down the trade performance of the bloc. All have suffered a relentless loss of competitiveness since EMU was launched. The deficits have reached 10% of GDP in Spain and 14% in Greece. None has begun to narrow the gap in unit labor costs with Germany, ensuring that the inevitable adjustment will be more severe when it comes." In trading the EUR/USD is below the 1.55 level as continued weakness in oil and commodity prices aided the USD. For the moment the USD is decoupling from the spread between the US-German 2-year notes, which has widened -174bps area from -154bps on Thursday.

·On the speaker front the Fed's Kohn said overnight that actions have helped to improve credit conditions, adding that markets are still far from normal, and pointing out that libor spreads are still high. Kohn added that accepting foreign collateral is worth considering. The ECB's Trichet said in an interview overnight that the ECB Council is concerned about high prices. Trichet said that returning to price stability is biggest challenge, noting that financial market correction ongoing. The ECB's Weber said overnight that the ECB remains ready to act in a firm and timely manner on inflation, noting that current inflation is the “most worrying disturbance” in the ECB's history.

·On the data front GFK consumer confidence in the UK declined to its lowest level since November of 1990, its weakest reading on record. German retail sales for the month of April were lower than expected, posting large declines for the second consecutive month as the result of inflationary pressures. Back month figures were downwardly revised. French producer prices for the month of April were stronger than expected aided by strong readings in the capital goods, and energy products components. The reading was accompanied by small upward revisions to the back month readings. The Euro-Zone CPI estimate for the month of May was 3. 6%, the highest since records began in October of 2001. Similarly, the preliminary CPI data in Italy for the month of May was ahead of estimates with the y/y readings reaching multi-year highs.

Published on  Fri, May 30 2008, 13:41 GMT