European Market Update: Currency intervention talk heats up; Indian shares halted for the first time ever after breaching an upper limit following election results


ECONOMIC DATA

- (JP) Japan April Tokyo Dept Store Sales Y/Y: -11.9% v -12.9% prior, Nationwide Dept Sore Sales Y/Y: -11.3 v -13.1% prior

- (TU) Turkish Apr Consumer Confidence: 80.8 v 74.8 prior

- (SP) Spain March Bad loans ratio 4.27% v 1.2% y/y

- (RU) Reportedly Russian April Industrial output -16.9% v -14%e y/y

- (EU) Euro-zone Mar Trade Balance: €400M v -€300Me; Trade Balance sa: -€2.1B v -€3.8Be


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- European equity markets opened to the downside this morning, continuing the profit taking theme seen rolling over from the Asian trading session. Pre-market trading was to the downside as well, with notable underperformance from the DAX30. Comments out of VW [VOW.GE] regarding the cancellation of planned merger talks with Porsche [PAH3.GE] that had been scheduled for Monday, along with further statements that VW saw no constructive reasoning to immediately re-schedule negotiations sent those names lower. The European automotive sector as a whole traded lower with French names, such as Renault [RNO.FR] and Peugeot [UG.FR] leading lagers on the CAC40. Banking names showed mixed results, a FT article noting that US small and mid-cap banks could need an additional $24B in capital swirling further concern in the strength of banking balance sheets. On the open, equity markets traded lower, pushing off to losses greater than -1% by 3:15EST.
Shares of Lloyds [LLOY.UK] staged a recovery following 3:15amEST. In the pre-market Lloyds had priced its £4B right placement as it attempted to buy back some UK Treasury held preference shares. News that the groups Chairman was to step down in 2010 out of the UK press also provided positive momentum in the name. By 3:30amEST the FTSE100 turned positive, moving to then session highs +0.25% while the CAC and DAX paired some of their opening losses. Markets traded in a tight range through the 4:00-5:00amEST, with the FTSE holding to positive territory and the CAC and DAX with losses around the -0.75% mark. Leading up to 5:00am EST, markets exhibited some strength, rallying in currencies against the Yen following statements out of the Japanese vice Fin Min and a strong Euro Zone March trade balance provided lightness. Past 5:00EST, the CAC and DAX paired nearly all their opening losses, down less than -0.25%

- Lloyds [LLOY.UK] Launches £4B Placing and Open Offer set for May 20. Proceeds from the Placing and Open Offer will be used to redeem the £4 billion of preference shares held by UK Treasury. Offer price set at 38.43p/share (57% discount from Fridays close). Chairman Blank to step down in 2010 (had been instrumental in HBOS merger). Lloyds named Alexander Leitch, who becomes the group's senior non-executive director at the next annual general meeting, as deputy chairman. A Volksagen [VOW.GE] spokesman said the company had canceled merger talks with Porsche scheduled for Monday, noting that there is currently no atmosphere for constructive talks. Volkswagen remains open to constructive talks with Porsche, but said it remains uncertain if and when talks could resume. A Porsche spokesman said his company would stick to the agreed confidentiality of the talks and declined to elaborate further.

- In speakers, the ECB's Weber noted in a report that simulative measures set out by ECB would be adequate unless conditions deteriorate significantly. The report reiterated that negative Euro Zone inflation could occur for several months in the summer, before rising to 1% or more toward year-end. He noted that monetary policy needs time to produce impact but one should not exaggerate hopeful signs seen in financial markets. Weber reiterated that current interest rates were appropriate given the current environment and warned against excessive optimism from positive economic data. He did note that the worst of economic crisis might be over in Germany while also saying he does not see sustained positive growth before mid-2010 and that setbacks could still occur. || The ECB's Tumpel-Gugerell reiterated the ECB view that inflation could be negative in the coming months. She noted that the monetary policy must act appropriately and leave "no stone unturned" in combating the issues at hand and reiterated that keeping inflation near 2.0% target was priority of the central bank. Lastly, an economic recovery can only take place once confidence has been restored || Japanese Vice Fin Min Sugimoto commented that the Ministry continues to monitor currency markets, do not want currency markets to have negative effect on economy. He noted that the finances in Japan remain severe and that discipline remained important || Moody's unified the government of Japan's local and foreign currency bond ratings at Aa2, increasing its domestic currency bond rating (the JGB rating) from Aa3 and lowering its foreign currency bond rating from Aaa. Moody's outlook for the Japanese government's ratings was stable. Japan's foreign and domestic currency long-term bond ceilings and deposit ceilings remain unchanged at Aaa, and its short-term ceilings remain at Prime-1. || Japanese Finance Minister Yosano commented that Moody's action reflects the ability of Japanese market to absorb further JGBs || China reiterated that it would take additional measures if its economic recovery stumbled. || China FX Regulator SAFE announced rules to promote outbound investment. The agency said Chinese firms could borrow in foreign currencies and invest overseas profits abroad.

- In currencies, the surge in Indian shares helped to stem any risk aversion flows that characterized the early Asian trading session. USD and JPY came off their best levels ahead of the European mornings after Indian equity markets were halted for the first time ever after breaching an upper limit. USD/JPY was at 95.40 after testing 94.55 in Asia. EURJPY and GBP/JPY crosses were also well off their Asian session lows of 127.00 and 143.10 respectively. The JPY weakness was also aided by comments from Japanese top finance official Sugimoto that the Government was carefully watching the currency markets carefully. The EUR/USD bounces off its 200-day moving average of 1.3410 in Asia to hover around the 1.3450 area for most of the European morning. || Reportedly Singaporean Central bank to intervene if pair moves below $1.46 fro its current level of $1.4715 || The BOJ might upgrade its economic assessment for the first time in 2 years according to Japanese press reports. This has been echoed in the media lately. Numerous times last week there was chatter that the Japanese Government would likely upgrade its economic assessment for the first time in three years citing the fact that exports and production were showing signs of bottoming out.

- In fixed income, government bonds have performed reasonably well in thin volumes in Europe this morning, with Gilts outperforming Bunds ahead of the BoE's 20th reverse auction. Some selling has moved into T-Note futures at the time of writing with session lows at 121-13. Three month Euribor fixed at a new low of 1.44%, with 2y EUR swap spreads at the unchanged mark.

- In energy, Iran said it would raise oil production to over 5M bpd from current level of 3.6M bdp || Brazilian President Lula da Silva plans to meet with Chinese President Hu Jintao to finalize terms of funding partnership for Brazil's oil industry by China in exchange for guaranteed oil shipments || Nigeria MEND militants attack two oil and gas pipelines near to Escravos which supply the 110K bpd Kaduna refinery in northern Nigeria.


NOTES

- Moody's unifies Japanese debt ratings. Japan's local and foreign-currency debt ratings were brought to the same level, Aa2, to reflect that the repayment risk for each is equal. Moody's cut the foreign-currency debt rating from Aaa and raised the local-currency assessment from Aa3 to unify the ratings

- The cycle of life. Dealers noting that the underlying theme has evolved over the last few weeks from the initial global financial collapse risk; to the duration of crisis risk and now morphing into the durability of recovery risk.

- SNB managed to keep the EUR/CHF cross above the 1.5000 level following the London close on Friday. Japan follows with verbal intervention during the European session today. Chatter that Singapore will intervene in USD/SGD below the 1.46 handle

- White House NEC Director Summers: US economy is no longer in freefall; Economic data "suggests more mixed picture than two months ago"

- IMF: Global expansion to start next year; ECB's Webers say not before mid 2010

- Dealers noting that the US NAHB Housing Market Index will be used to for further sign of stabilization

- Looking Ahead:

- 11:30 (US) Treasury's Geithner speaks in Washington

- 13:00 (US) NAHB Housing Market Index: 16 expected versus 14 prior