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European Market Update

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USD sentiment recovers as Japan stands by its US Treasury investment

Fri, Jun 12 2009, 12:39 GMT
by Trade The News Staff

TradeTheNews.com

European Market Update: Euro Zone Industrial production declines by record amount and bucks China's and India's trend in data series; USD sentiment recovers as Japan stands by its US Treasury investment

ECONOMIC DATA

- (IN) India Apr Industrial Production Y/Y: 1.4% v -0.1%e

- (GE) German Wholesale Price Index M/M: 0.1% v 0.1%e; Y/Y: -8.9% v -9.0%e

- (FR) French Apr Current Account: -€3.1B v -€3.2B prior; Central Gov't Balance: -€71.9B v -€ 43.7B prior

- (FR) French May CPI M/M: 0.2% v 0.2%e; Y/Y: -0.3% v -0.2%e

- (FR) French May CPI EU Harmonized M/M: 0.1% v 0.2%e; Y/Y: 0.3% v -0.2%e; CPI Ex Tobacco Index: 118.18 v 118.14

- (HU) Hungarian Apr Final Industrial Output M/M: -5.1% v -5.1% prior; Y/Y: -25.3% v -25.3% prior

- (HK) Q1 Industrial Production Y/Y: -10.2% v -10.6% prior; Producer Price Y/Y: -1.4% v 3.9% prior

- (EU) Euro-zone Apr Industrial Production M/M: -1.9% v -0.4%e; Y/Y: -21.6% v -19.8%e; Sharpest drop on record

- (IR) Irish Apr Industrial Production M/M: -5.4% v 3.0% prior; Y/Y: 3.1% v -6.9% prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- Equity markets extended a two day streak of down-side openings in Europe. Positive sentiment out of Asian equities, including an 8-month high close on the Japanese Nikkei failed to initially translate into Euro markets. The equity story of the morning remained focused on a finalized agreement between Barclays [BARC.UK] and BlackRock [BLK]. Under the terms BlackRock agreed to acquire Barclays Global Investors, including iShares business for a 19.9% stake plus $6.6B in cash, which is an implied value of $13.5B. The acquisition will give the new BlackRock Global Investors AUM of over $2.7T (greater than the US Fed). On the open, shares of Barclays traded -1.45% as the name paired some of its week long run-up gains. Equity markets continued their indecisive nature with the FTSE100 turning positive by 3:30EST and the CAC and DAX coming off their lows. Equity leaders remained mixed, most names trading higher on the back of analyst actions.
In sector performance, defensive healthcare names outperformed, comments out of GlaxoSmithKline [GSK.UK] regarding emerging markets operations pushed the sector. Markets trended above and below the unchanged mark in a tight range through the 3:00EST and 4:00EST hr. Euro-zone industrial production at 5:00EST broke a wave of positive economic data that had been seen out Europe, the US and Asia for some weeks. Coming in below expectations at -1.9% m/m, the disappointing industrial number provided some equity weight. The DAX30, with its heavy exposure to industrials and exporters continued its slide in negative territory declining to -0.35%. The CAC and FTSE slowly trended lower and by 5:30 had entered negative territory. Volumes on equity bourses remained low with the FTSE -8%, the DAX -38% and the CAC -17%.

- In individual equities: GlaxoSmithkline's [GSK.UK] CEO stated that the company was planning to lower prices for many of its top medicines in emerging markets.The plan to lower prices follows the company's successful pilot program in the Philippines. The CEO of the company said a 60% cut in the local price of the company's cervical cancer drug had increased sales eightfold. The WSJ reported that company rejected Russian demands for a 15% cut in its HIV drugs. Vedanta Resources [VED.UK] said it would launch $1B in convertible bonds (about 34% of market cap). 3i [III.UK] priced its rump placement at 277p/share. Allergy Therapeutics [AGY.UK] To raise up to £22.4M in share sale (approx 158% of current market cap). Azure Ventures has conditionally agreed to invest £12.5M in the Company by way of a subscription for 104.2M New Ordinary Shares at a price of 12p/shr (31% discount). Regal Petroleum[ RPT.UK] Announces Proposed Placing to raise approximately $100M (approx 40% of market cap). Details of the number of shares and the price will be announced as soon as practicable after the close of the book-building process. Les Echos reported that Axa [CS.FR] would cut 560 jobs in its UK operations (less than 1% of workforce). There were reports in Chinese media that BMW [BMW.GE] brand cars have been added to Chinese Gov't procurement list. Broadcast noted that China, which spent CNY80B on government vehicles last year and to purchase locally made BMW cars. The broadcast noted that Volkswagen AG's Audi cars currently dominate government car fleets, with no specific numbers provided.

- Speakers: Asia Development Bank's President Kuroda commented that Asian currencies might rise if Asia recovers before the US. He noted that Governments should not devalue their currencies. China's economic slowdown might have already bottomed out due to its stimulus measures. Japan, US and EU will likely rebound in H2 of 2010 and support Asian growth and that Asian growth to accelerate next year on policies supporting its domestic demand. However, he cautioned that Asia cannot rely on US consumption for growth in longer-term. Kuroda commented that deflation was a concern for both developed and Asian countries. ECB's Liikanen commented in a newspaper interview that 2009 would be a difficult year for global economy. He cautioned that any recovery would be slower after such a steep economic decline BoE's Fisher commented that its Q2 GDP growth would likely be negative and worse than that reported back for Q1. He stressed that one must not be complacent over UK economic outlook and would likely to see 'many bumps in road ahead'. Issues in financial sector pose major risks to growth and that growth could be limited if banks cannot lend. On the positive side, there were signs that UK output contraction could be slowing and the BOE member expected to return to positive growth over the next year or so. Inflation woul likely continue to decline throughout 2009. Household savings increase might also hurt recovery but the Sterling currency decline would help UK economic rebalancing German Fin Min commented that one should not weaken EU Maastricht Stability Pact. The ministry saw 2009 Federal net borrowing in the range of €50-60B. It forecasted 2010 gross Federal borrowing around €330B.

- In Currencies: The USD rebounded from its lowest levels of the week against its major European counterparts that was prompted by the comments from the Fed's Lockhart during the NY afternoon on Thursday. Lockhart noted that the dollar's role as a reserve currency might decline on a relative basis over time, but USD will remain reserve currency for quite some time. The USD formed a base during the Asian session aided by comments from Japan's Fin Min Yosano, who commented that Japan's faith in US Treasuries was 'unshakable'. The USD recovery continued in Europe as the Euro-Zone April Industrial Production fall by more than expected and suggesting that the region's contraction continued to point towards economic weakness. EUR/USD entering the NY morning just under the 1.4030 level. G8 fin min meet in Italy. Dealers noting that it was already pre mentioned by both French and German officials that currencies would not directly be a topic without central bankers present.

- In fixed income: Government bonds have put in a solid performance this morning in Europe, emboldened by the Japanese Finance Minister's "unshakeable" support for the USD and treasuries ahead of the G8 meeting in Italy, as well as yesterdays encouraging Long Bond auction. Yield curves have flattened substantially in both Bunds and Treasuries whilst in the UK a bull steepning bias still persists. The 10y Bund yield is about 8bps lower at 3.615%, the 10y Gilt yield is about 6bps lower at 3.965% whilts the yield on the 10y note is lower by about 6bps to fall below 3.80%. There was a plethora of European sovereign announcements as Spain, Austria and france announced new issues for next week. Germany saw its 2010 Federal gross borrowing at €330B while its upper house passed a law to limit new government borrowing.

- On the geopolitical front: Israel's PM Netanyahu may accept the notion of a Palestinian state based on "certain conditions" - Washington Times UN Security Council will vote on North Korea resolution on Friday. The 15-member body was to meet at 11:00 am (1500 GMT) for a likely vote on a draft resolution already agreed by its five veto-wielding permanent members -- Britain, China, France, Russia and the United States -- plus Japan and South Korea. The text calls on UN member states to slap biting sanctions, including tougher inspections of cargo suspected of containing banned items related to North Korea's nuclear and ballistic missile activities, a tighter arms embargo with the exception of light weapons and new financial restrictions. According to the US official, there are "fresh indications" that North Korea may be preparing a nuclear test (its third such test) as satellite surveillance has detected activity such as vehicles moving at several sites in North Korea. The US official said he suspects that North Korea is preparing for a number of missile tests.

NOTES

- Fed's Lockhart commented late Thursday that the Dollar's role as a reserve currency may decline on a relative basis over time, but USD will remain reserve currency for quite some time.

- Japan Finance Min Yosano: Japan's trust in US Treasuries was "unshakable"

- China May IP +8.9% v 7.7%, as rumored earlier this week; India Industrial Production Y/Y at 1.4% and above consensus expectations of -0.1%. Euro-Zone Industrial Prod data bucks the trend and falls more than estimates. The EU record contraction pointing to continued economic

weakness.

- German Bundesrat (Upper House) passes bill to limit new government borrowing

- Looking Ahead:

- 7:30 (EU) ECB's Trichet to speak in Bulgaria

- 8:30 (US) May Import Price Index M/M: 1.4% expected v 1.6% prior, Y/Y: -17.5% expected v -16.3% prior

- 10:00 (US) June Preliminary University of Michigan Confidence: 69.5 expected v 68.7 prior

- 10:30 (US) Fed 2013 - 2015 agency coupon purchase

- G8 Finance Ministers' weekend meeting in Italy

- Iranian Presidential elections

Published on  Fri, Jun 12 2009, 12:43 GMT