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European Market Update

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UK Retail Sales Skyrocket; SNB Holds Rates at 2.75%

Thu, Jun 19 2008, 12:18 GMT
by John J. Phillips IV

TradeTheNews.com

ECONOMIC DATA

• ·SZ May Trade Balance (CHF): 1.87B v 1.58Be
• ·SZ SNB holds rates at 2.75% as expected
• ·UK May Retail Sales: M/M 3.5% v -0.1%e || Prior revised from -0.2% to -0.3% |||| Y/Y 8.1% v 4.1% || Prior revised from 4.2% to 3. 8%
• ·UK May Public Finances: £11B v £6.5Be || Prior revised from £1. 0B to -£900M
• ·UK May Net Borrowing: £11B v £9.3Be || Prior revised from -£500M to £1.8B
• ·UK May Preliminary M4 Money Supply: M/M 0.4% v 0.5%e || Prior revised from 0.6% to 0.5% |||| Y/Y 10.0% v 10.5%e || Prior revised from 11.1% to 11.0%
• ·UK May Preliminary M4 Sterling Lending: £4.8B v £18.7Be || Prior revised from £27.9B to £28.8B

SPEAKERS/ FIXED INCOME/FX/COMMODITIES/ERRATUM

·In sector rotation overnight Goldman Sachs raised the Oil Services sector to an Attractive rating from a Neutral rating. Leap (LEAP) announced amendments to its credit agreement overnight to resize and amend certain baskets and exclusions to reflect the growth in the Company's business and ongoing business expansion activities. The amendment permits the Company to incur additional unsecured debt, to issue certain preferred stock, and to make certain other modifications. HBOS [HBOS.uk] said in an trading update overnight that trading continues to be satisfactory, guiding a tier 1 ratio of 8%-9%, and noting that mortgage arrears remain in line with forecasts. HBOS also said that they see the UK economy weakening further in 2008. Cadbury [CBRY.UK] said overnight that they see 1H growth above its 4%-6% goal range, adding that they see double digit growth across all segments. Cadbury also said that they are confident of positive results in 2008 despite challenging economic conditions and increasing input costs. An analyst at Goldman Sachs commented on the European financial sector noting that Goldman expects that UBS faces Q2 'earnings headwinds' of CHF4B, Credit Suisse faces possible CHF1.1B markdowns and Deutsche Bank faces 'earnings' headwinds of €480M.

·In the newspapers, according to the Financial Times Telefonica [TEF.SP] wants to acquire a 10% stake in China Unicom (CHU). The Financial Times also wrote that Telefonica is not looking to buy a stake in Telecom Italia [TIT.IT] According the New York Times Exxon (XOM), Shell [RDSA.UK], Total [FP.FR], BP [BP.UK] and Chevron (CVX) are in talks with the Iraqi government regarding no-bid contracts for some of the country's biggest oil fields. The article notes that agreements are expected to be announced on June 30. According to Il Sole 24 Ore Credit Suisse [CSGN.SZ] and Goldman Sachs (GS) may bid for Banca Monte de Paschi Siena's [BMPS.IT] asset management unit.

·In energy news overnight the Venezuelan Oil Minister said that oil markets are adequately supplied, and noted that he will not attend the Jeddah meeting. The Oil Minister said that he expects the lowest price for WTI in 2008 to be $100/barrel, adding that he does not plan to raise output and will only do so if OPEC agrees to. The Financial Services Authority (FSA) said that it could veto American efforts to impose regulation on the London oil market, as the City took centre stage in an escalating row over the role of speculators in driving up the global price of crude oil. Goldman raised its 2008 Brent crude average price forecast by 9% to $117/barrel overnight. Goldman raised the2009 average price forecast by 27% to $140/barrel, and raised the 2010 average price forecast by 25% to $150/barrel. An Iranian official said overnight that Iran has informed big powers that it is ready to negotiate over a nuclear incentives package. Royal Dutch Shell [RDSA.UK] shut down its 225K bpd Bonga oil field overnight following an attack. Shell noted that no force majeure has been declared after the Bonga attack.

·In new supply overnight Spain sold €1.87B in July 2018 bonds with an average yield of 4.841%, and a bid-to-cover of 1.55x. In France the AFT sold €2.02B in 3.75% September 2010 BTAN with an average yield of 4.84% and a bid-to- cover of 2.649x, as well as €2.485B in 3.75% January 2013 BTAN with an average yield of 4.91%, and a bid-to-cover of 2.066x. In related news the Wall Street Journal wrote overnight that US Treasury Secretary Paulson is expected to call for increased power for the Fed. According to the article Paulson also is expected to advocate faster changes regarding the oversight of banks. A related report in the Financial Times said that Paulson is expected to say the bailout of Bear Stearns has increased expectations of similar bank bailouts in the future.

·In currencies the USD was mixed in European trading overnight. The GBP was broadly firmer following better than expected retail sales data from the UK. The GBP/USD rose 100 pips to 1.9695, The EUR/GBP fell 50 pips to 0.7875, and the GBP/JPY firmed by 100 pips to 212.25. Dealers noted that SONIA swaps are currently pricing in approximately 44% probability that the BOE will raise interest rates by 25bps in July, up from about 16% yesterday. The USD gained against the Euro and Swiss Franc during the session. The SNB decision to hold its 3-month target at 2.75% prompted some covering of short USD positions as interbank traders were betting that the SNB could surprise the market at today's policy meeting. The USD/JPY is steady at 107.85 but off earlier lows after BoJ Governor Shirakawa reiterated that the Japanese economy was slowing due to effects from high energy and commodities prices.

NOTES

·The SNB left interest rates on hold at 2.75% overnight as was widely expected. The SNB commented noting that they believe that current inflation will be temporary, adding that the medium-term inflation outlook still allows for an unchanged policy. The SNB's quarterly rate decision comes two weeks before the ECB is due to announce results from its July policy-setting meeting. While the ECB seems bent on raising rates in July, it is interesting to note whether or not the ECB will consider the SNB's view on the inflation situation.

·UK retail sales were sharply ahead of expectations with the y/y reading at its highest level since April of 2002, while the m/m reading was the highest since records began in 1986. Coupled with comments from the BOE's minutes yesterday if the data flow continues in this manner more central bank speakers are likely to consider rate a rate hike at the next policy setting meeting.

Published on  Thu, Jun 19 2008, 12:19 GMT