European market Update: German May IFO improved less than expected, rising to 84.2; UN Security Council to meet later today regarding North Korea nuclear test and missile launches


ECONOMIC DATA

-(JP) BOJ Monthly Report raised Japan's economic assessment for the first time since 2006

- (JP) Japan Cabinet Monthly Economic Report: Raises overall economic assessment for the first time in 3 yeras

- (GE) German Mar Real Construction Orders nsa Y/Y: -9.1%; YTD -16.4% - Stats office

- (SP) Spain Apr Producer Prices M/M: -0.3% v 0.1%e; Y/Y: -3.4% v -3.1%e

- (CZ) Czech May Business Confidence: -8.1 v -7.2 prior; Consumer Confidence: -16.0 v -20.5 prior

- (HU) Mar Hungarian Retail Trade: -3.6% v -3.5%e

- (TT) Taiwan Apr Exports Orders Y/Y: -20.9% v -25.4%e

- (TT) Taiwan Apr Industrial Production Y/Y: -19.9% v -25.0%e

- (GE) German May IFO Business Climate: 84.2 v 85.0e; Current Assessment: 82.5v 84.5e; Expectation: 85.9 v 85.5e


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- In equities: Equity markets began an abbreviated trading session on mixed geo-political fears following North Korean nuclear tests and SSM launch. With the UK closed for Spring Bank Holiday and American desks closed for the Memorial Day holiday, thin conditions rolled over from Friday's session. Markets opened on a positive note following the late rally in Asian equity markets but quickly surrendered the opening ranges and by 3:15EST were printing in the red. Once negative, in continued thin trading, markets continued to trade to the downside with the CAC below -1% by 3:50EST and the DAX below -1.75% by the same time as markets positioned themselves for the German May IFO business climate reading. Some sectors that under performed broadly included automotives, Fiat [F.IT] which had reportedly revised its bid for OPEL and Porsche [PAH3.GE] which had reportedly been extended a €750M credit line from VW [VOW.GE] led the automotive decline. May IFO numbers came in below expectation but higher on a m/m basis, these mixed results translated into little equity movements as both the CAC and DAX held their ranges at -1.4% to -1.7% on the session at 4:15EST. In light volume, equity markets bounced off their lows and trended higher through the bottom half of the 4:00EST hour while still remaining broadly negative. On the back of declining volumes, equities settled into a tight range by 4:45EST with the CAC -.9% and the DAX-1.20% that was held through 5:30EST.

- In individual equity news: Aviva [AV.UK] National Australia Bank (NAB), Westpac, AMP and Axa Asia Pacific are first round bidders for the company's A$1B Australian life insurance business - FT. ||Marks and Spencer [MKS.UK] Executive Chairman Sir Stuart Rose may be quietly preparing to leave the company early - London Times. Rose said publicly for the first time last week that he hoped to go before his previously announced departure date. || Lloyds Banking Group [LLOY.UK] Has accelerated its efforts to sell its stakes in more than 60 UK companies - London Telegraph. The stakes were inherited from HBOS. || Areva [CEI.FR] May announce divestment of its transportation and distribution units in June -FT. Sales would be used to raise funds for further investment projects. No price target for unit is given. || Alstom [ALO.FR] Plans tidal power equipment sales with Canadian partner by 2012. JV with Clean Current Power Systems. || Fiat [F.IT] Update: Reportedly Fiat has revised offer for OPEL -Deutsche Presse-Agentur. Comments were made by German Econ min Guttenberg. Stated that Fiat was willing to increase its stake in OPEL's capital unit. Specific details of the offer were not released. || Escada [ESC.GE] Update: Group still predicts a H1 net loss, current balance sheet losses exceed 1/2 of capital stock. Reiterates FY09 sales down y/y. Guides H1 sales in lower range of target (loss at €17.8M). || Rhoen-Klinikum RHK.GE: Update: Reportedly seeking to raise €500M in rights offer (approx 30% of market cap). ||

- Speakers: ECB's Weber commented that there were glimmers of hope for mild economic recovery but caution there were risks of massive worsening German unemployment. Downward trend in economic cycle was easing and that the ECB would be ready to mop up extra liquidity in the market when the economy recovers. Weber did caution that the market situation remained difficult and dangerous. EU states must reduce deficits once economy bottoms out, stimulus programs would have a significant impact

|||EU's Almunia: Have so far seen scarce signs of recovery in the global economy. German government stimulus would not be enough to make up for losses in exports ||| IFO economists commented that it expected a gradual stabilization in economic output at current lower levels. Manufacturers were seeing worse business situation in May in comparison to April.
Retailers are less dissatisfied with condition in May as compared to April ||| IFO's Abberger commented that the ECB should stay neutral on interest rates for the current time, but noted that rate cuts below 1% might be taken. Euro appreciation levels are not the main concern for businesses, rather the lack of demand larger concern. Full economic turnaround was not currently in sight, but a free fall seen in late 2008 was now over and saw signs of stabilization taking root. Retailers do not expect collapse in consumption but rising unemployment might hurt in medium term ||| IFO's Nerb commented that the ECB has room to cut interest rates to 0.50% ||| BoJ Shirakawa commented that he expected Japan's Q2 GDP to be better than the -15.2% registered in Q1. He noted that is was desirable for Japanese banks to reduce stock holdings more as stock-holding risk was higher than credit risk. The BOJ was focusing on how demand picks up, but outlook on final domestic demand was not optimistic. The rise in long term yield on US Treasuries reflect expectations of economic recovery || BOJ Monthly Report noted that Japan's exports and production were beginning to level off and that the pace of economic deterioration was likely to moderate || Japanese Min of Finance's Sugimoto commnted that the Japanese economy remained in a severe state and he hoped that the deterioration moderates. He noted that the deterioration in labor markets specifically has been abrupt ||| Japanese Govt also raised its economic assessment In May as it noted that the worsening pace turned milder. The report raised its view on both exports and industrial output and noted that the pace of worsening was slowing as exports and industrial output are nearing bottom. It raised public investment assessment to steady and also raised bankruptcy assessment. The report did cut its unemployment assessment to "severe" from "worsening rapidly" ||| Irish Fin Min commented that there were no further bank nationalizations in Ireland. He also noted that leaving Euro-zone would be 'absurd' ||| Russian President Medvedev commented that its 2009 GDP contraction would be deeper than forecast; Budget deficit "optimistically" at least 7% of GDP |||

- In Currencies: Market participants taking note of UK press report on China. FT article noted that the Chinese are caught in a "dollar trap" and are still buying record levels of U.S. Treasuries. The report cites unnamed Chinese and western officials in Beijing saying that China was caught in a "dollar trap" and has little choice but to keep pouring the bulk of its growing reserves into the U.S. Treasury, which remains the only market big enough and liquid enough to support its huge purchases. This is despite verbalized concerns about the impact that U.S. policies may have on the USD.

- The Euro price action was a key discussion among dealing deals on this lightened holiday session. Dealers noted numerous reasons for a stronger Euro in the coming period. First being cross-related action. Discussion on steps China could take as press articles note their USD dilemma holdings. Currency dealers taking notice of recent price movement in EUR/USD pair and the Russian Central bank action. Dealers note that the Russian Central Bank (CBR) has been trying to prevent the RUB from strengthening. Thus CBR doing everything to slow or prevent RUB from strengthening implies lots of Euros to be bought. As we head into the summer period, the volatility in currencies might return with a vengeance.

- The EUR/USD approaching the NY morning at 1.3980 level. EUR/GBP hugging the 0.8800 area throughout the morning.

- The JPY was weaker among its major pairs due to political risk following the North Korean nuclear test and missile launches. USD/JPY was at 95.05, EUR/JPY at 132.80 and GBP/JPY at 150.90. The JPY did not respond to the BOJ and Government reports that raised their overall economic assessment for Japan for the first time since early 2006.

- the CHF was mildly firmer on safe-haven flows resulting from the North Korean test and spot gold was steady at $954.30/oz.

-In Fixed Income: Telegraph's Ambrose Evans-Pritchard noted that there is growing skepticism in the markets that the Treasury's sale of $100B of bonds would successfully find buyers. At the upcoming US debt auctions some traders will be focusing on how much of the auctions are taken up by the US government. The article adds that China has warned a top member of the Fed that it is increasingly disturbed by the Fed's direct purchase of Treasury bonds. The Dallas Fed's Fisher said "senior officials of the Chinese government grilled me about whether or not we are going to monetize the actions of our legislature"

- I n Energy: Saudi Oil Min Naimi commented that a price spike similar or worse than 2008 could occur within three years without fresh investments.- Keeping investment focus on long-term rather than being swayed by short term volatility.
Current market conditions largely reflected economic downturn and is not an indicator of thing to come

|||IMF's Lipsky commented that there was relative stability in oil market in near term as capacity and inventories are at comfortable levels. The Near term rebound in oil demand likely to be modest. Supply constraints could reemerge and drive prices higher in medium term || Iranian oil official: Reiterates view that high oil stocks suggest oversupply; Output cut is a clear solution || Nigerian MEND militant claim to have attacked pipeline and flow stations owned by Chevron || Iran and Pakistan are reported to sign a formal accord on gas in two weeks in which Iran would export 750M c/f pd for 25-yr period ||


NOTES

- Thin trading conditions as both UK and US equity and fixed-income markets are closed for holidays.

- German IFO rises but does not beat consensus estimates. IFO members note that lack of demand larger concern then Euro currency levels

- North Korea conducts an underground nuclear test and several short-term missile tests. UN Security Council calls emergency meeting scheduled for 4pm ET (20:00 GMT) on Monday.

- China warns US Federal reserve that they are increasingly disturbed by Feds printing money.

- FT: Chinese are caught in a "dollar trap" and are still buying record levels of U.S. Treasuries

- Saudi Oil Min Naimi commented that a price spike similar or worse than 2008 could occur within three years without fresh investments

- Looking Ahead:

- 7:00 (BR) Brazil May FGV Consumer Confidence: No estimate versus 97.6 prior

- 8:00 (HU) Hungarian Interest rate Announcement: Expected to leave Base rate steady at 9.50%

- 10::00 (BR) Brazil Q1 Current Account Balance: -$2.32B expected versus -$6.12B prior

- 10:30 (IS) Israeli Interest Rate Announcement: Expected to leave its Base rate steady at 0.50%

- 15:30 (MX) Mexico Q1 GDP (Constant USD) Y/Y: -2.7% expected versus +2.8% prior

- 16:00 - UN: Security council to meet to discuss N Korean actions