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European Market Update

Risk appetite is firmly underpinning sentiment

Mon, Jul 20 2009, 12:40 GMT
by Trade The News Staff

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European Market Update: Risk appetite surges, with equity and commodity markets firmer and USD, JPY currencies broadly weaker

ECONOMIC DATA

- (GE) German Jun Producer Prices M/M: -0.1% v 0.4%e; Y/Y: -4.6% v -4.1%e

- (NV) Netherlands May Trade Balance €2.5B v €2.4B prior

- (NV) Netherlands May Consumer Confidence: -24 v -24 prior

- HK Hong Kong June Unemployment Rate SA: 5.4% v 5.4%e

- (UK) June Preliminary M4 Money Supply M/M: -0.2% v 0.4%e; Y/Y: 14.2% v 14.6%e

- (UK) BoE Trends in Lending Report: Jun Mortgage Approvals 51.1K v 45.0K prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- European equities looked eager to continue last week's strong performance following gains out of the Asian trading session. Continuing to shrug off lower top-end earnings out of US giants on Friday, equity markets continue to take hope from re-hashed themes: Asian growth/recovery and the USD's decline against currency pairs/commodities. In sector rotation, Morgan Stanley raising the Euro Capital Goods sector to neutral from cautious led to some positive momentum.
Earnings out of auto suppliers Continental [CON.GE] came in slightly light of expectations, although reassurances that the group was firmly within the parameters of its debt covenants buoyed the equity and fellow sector names. Financials continued their upward trend with news out of Lloyds [LLOY.UK], Barclays [BARC.UK] and earnings out of Swedish lender SEB [SEBA.SW]. Reports from German media sources over the weekend that the state was planning to offer a US-style bank bailout for needy firms added further momentum to the DAX listed sector members. Commodity gains continued to push mining and basic resource names with FTSE sector players outperforming. Equity volatility remained muted through the hours of 3:00amEST and 4:00amEST with markets trading in a tight band while trending slightly higher. In the absence of significant data, markets floated in a range of approx +1.00% until just after 5:00EST when the DAX, CAC and FTSE all rapidly accelerated to the upside in line with US equity futures and gold futures. Market volumes remained muted with only the FTSE outperforming its average on the back of high volume in some of its banking names (Lloyds [LLOY.UK]) while the CAC and DAX sat below their moving averages.

- There were press reports overnight that Germany is considering a US-style bank rescue plan. Under the plan, the German government would become shareholders in the banks after forcing them to accept the aid. In the past, Chancellor Merkel and Finance Minister Steinbrueck have opposed such a plan. The German Finance Ministry later denied these reports, stating they have "no plans for mandatory recapitalization of banks." The UK press writes that new accounting rules may enable Lloyds [LLOY.UK] to post a H1 net profit (-£5.1Be). The new rules will enable firm to write-off billions in real-estate sub prime investments, while bad debt provisions may rise to as much as £13B. A report in the Telegraph says that Rond Sandler, exec at nationalized Northern Rock, is under consideration for the chairman's role at Lloyd's. The article notes that Sandler is on the short list with to group of four candidates. Barclays [BARC.UK] Exec Roger Jenkins plans to leave the firm to set up independent shop. Jenkins was a key player in setting up a financing package in October that allowed the bank to reject a government bailout offer. HSBC [HSBA.UK] has reportedly shortlisted five firms to support bookrunning for its mainland China share sale, according to Apple Daily. The article says approval for a share sale may be granted by Chinese authorities as early as the beginning of 2010. SEB Bank [SEBA.SW] reported a Q2 net loss of SEK193M versus expectations of a net profit SEK1B. Revenue was SEK13.2B v SEK11.6Be, net interest income was SEK5.4B v SEK5.6Be, the bank's tier 1 capital ratio was 13.1% v 11.10% q/q and loan losses hit SEK3.6B v SEK448M y/y. The bank's long-term positive outlook on Baltic region remains unchanged, with executives insisting the bank remains committed to operations in the region.
GlaxoSmithKline [GSK.UK] is in talks to supply 30 additional countries with anti-flu vaccines, with sales possibly reaching £1.3B by 2010, according to the UK Telegraph. Continental [CON.GE] reported a Q2 EBIT of €38.8M v €40.8Me and revenue of €4.76B v €5Be. First-half adjusted EBIT was €248.7M and revenue was €9B v €9.5Be, with the company warning that "big challenges" remain for supplier industry. Liquidity reserves at end of June remained at a solid level, although the firm continues to see the tight financing situation as a major hurdle in the rest of the year. Salzgitter's [SZG.GE] CEO said the company expects to record a loss in Q2, versus expectations of a small profit. Deutsche Post World's [DPW.GE] mail unit may report FY09 profits slightly ahead of forecasts, according to Die Welt. The figure is lower y/y but ahead of the firm's prior guidance. Lufthansa [LHA.GE] is looking to sell loss-making unit BMI Airlines, according to the Sueddeutsche Zeitung. Finmeccanica's [FNC.IT] DRS unit awarded $100M contract with US army.

- In speakers: the German Finance Ministry commented that Q2 GDP might be better than expected, saying that indicators suggest the German economy might be bottoming out. The MoF said it expects moderate inflation in coming months but not deflation (in line with the standard ECB position). Exports might stabilize in coming months and the labor market remained "robust." Private consumption likely to have supported economy in Q2. German Finance Ministry denied press speculation and noted that it had no plans for mandatory recapitalization of banks. The MOF stated that it was up to banks to make use of facilities available |Polish Fin Min: Current 2009 deficit could exceed 5% of GDP level. Singapore Trade Min Lim commented that any pick up in trade would be 'bumpy' and he did not expect' V-shaped' recovery, although retrenchments eased in Q2. He noted that a gradual economic recovery was likely. Rebound in drug, electronics output might falter while the services sector to continue to 'languish'. Polish Treasury Min Grad commented that Poland to sell between PLN 15B to PLN20B of assets in 2010 in a press interview. Israeli Central Bank Gov Fisher commented that have seen signs of recovery in EU and US. He also noted that the signs of recovery evident in global export market. UK Council of Mortgage Lenders (CML) noted that seasonal factors might support lending volumes over the summer period

- In currencies: risk appetite is firmly underpinning sentiment as the USD and JPY currencies were under pressure against most other currencies in European session trading, particularly as commodities have been correlating with emerging market units throughout the session. Following Wall Street's best week in four months and CIT reportedly cutting a deal with bondholders that would allow it to avoid bankruptcy, the EUR/USD pair hit fresh six-week highs above the 1.4230 area. AUD/USD moving above the 0.81 30 level while USD/CAD moved to 1.1050 area. Commodity prices were firmer with NYMEC Aug crude up over a $1.00 to trade above the $64.50 level ahead of the NY morning. Spot gold up over 1.5% to test $950/oz.

- In energy/commodities: Russian PM Putin said Russia would apply a zero percent export duty for its Eastern Siberian oil fields. Measures to apply to 13 fields and will become effective in 2 months time and run for 9 month period. Iran's IAEA Ambassador Soltanieh stated that IAEA inspections in Iran are proceeding with no obstacles or delays

- In Fixed Income Supply: Government bonds are weaker this morning in Europe amidst another bout of equity strength and broad based risk appetite. Gilt markets showed little reaction to an undershooting in UK money supply and "less worse" mortgage lending figures for June . The German yield curve is undergoing some bear flattening whilst steepening continues in both Gilt and Treasury markets. 2s10s in both regions sit right near their widest levels since early June at 265bps and 268bps respectively. The yield on 2y Note is back above the 1.00% level where a confluence of 50 day and 200 day moving averages currently sit. The 10y Note is yielding 3.69%, 13bps above its 50 day moving average ( the cheapest is has traded relative to that average in all of July).The 10y Gilt is yielding 3.851%, about 10bps above it 50 day moving average whilst the 10y Bund is yielding 3.46%, less than 1bps above its 50 day moving average. In corporates, the investment grade iTraxx Europe index opened 6bps lower at 102bps, its lowest level since early September 2008, in the days leading up to the collapse of Lehman.

Looking Ahead

- 8:30 (CA) Canadian May Int'l Securities Transactions: C$7.0B e v C$9.0B prior

- 8:30 (CA) Canadian May Wholesale Sales M/M: -2.1%e v -0.6% prior

- 10:00 (US) June Leading Indicators 0.5%e v 1.2% prior

- also might see (No specific time set for release)

- (RU) Russian Jun Unemployment Rate: % v 9.8%e

- (RU) Russian Jun Real Wages Y/Y: % v -3.6%e

- (RU) Russian Jun Investment In Productive Capacity: % v -20.0%e

- (RU) Russian Jun Retail Sales (Real) M/M: v 1.0% prior, Y/Y: % v -6.4%e

- (RU) Russian Jun Disposable Income: % v -2.1%e

Published on  Mon, Jul 20 2009, 12:47 GMT

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