European Market Update: European central bankers continue to issue cautious views on economic recovery, but reiterate that the worst is over


ECONOMIC DATA

- (CH) China May Vehicle sales: 1.12M, up 34% y/y

- (GE) German Apr Trade Balance: €9.4B v €9.3Be; Current Account:€5.8B v €10.0Be

- (FR) May Bank of France Bus Sentiment: 81 v 77e

- (FR) French Apr Trade Balance: -€3.8B v -€4.5Be

- (CZ) Czech May CPI M/M: 0.0% v 0.1%e; Y/Y: 1.3% v 1.4%e

- (CZ) Czech Q1 Final GDP Y/Y: -3.4% v -3.4% prior

- (HU) Hungarian Q1 Final GDP Y/Y: -6.7% v -6.4% prior

- (HU) Hungarian Apr Trade Balance: €429.7M v €250.0Me

- (SP) Spanish Q1 Home Sales Y/Y: -34.2%

- (DE) Danish Apr Current Account: DKK2.9B v -DKK0.2B prior; Trade Balance x Ships: DKK3.1B v DKK4.4B prior

- (UK) DCLG UK House Prices Y/Y: -13.0% v -13.3%e, first month-on-month improvement since Oct 2007)

- (SA) South Africa Q2 BER Business Confidence: 26.0 v 27.0 prior

- (SZ) Swiss KOF June Economic Forecast: Lowers both 2009 and 2010 GDP view. Sees 2009 GDP at -3.3% v -2.4% prior forecast

- (GE) German April Industrial Production M/M: -1.9% v 0.3%e, Y/Y: -21.6% v -20.5%e


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- Equity markets opened on a positive note despite negative equity sentiment coming out of Asia. Bank of France business sentiment ahead of expectations at 81, along with positive commentary on industrial and service sector operations provided a lift to equity futures at 2:30EST. This data overcame mixed German trade balance data and combined with a declining dollar index on the European open to lift equity markets. Initial sector performance proved mixed as airlines, including Air France [AF.FR] and BA [BAY.UK] traded lower on negative news but Lufthansa [LHA.GE] traded higher on the back of a RBS upgrade. Heavy manufacturers and basic resource names traded higher on the open paring their losses seen in yesterdays risk adverse session. Chinese May new vehicle sales, seen at +34% y/y, rallied auto names with Renault [RNO.FR], VW [VOW.GE] and Daimler [DAI.GE] trading higher. Continental markets pushed above the +1% mark by 3:15EST while the FTSE tested its highs at +0.9%. Following these peaks, markets trended sharply downward. Markets took a second leg down as the UK April housing prices number approached at 4:30EST. That figure, showing the first m/m gain since Oct, 2007 stabilized the decent of the FTSE at +0.25%, but continental bourses continued their downtrend. Simultaneous comments from a Chinese Foreign Minister regarding the central role that the USD will play moving forward provided further weight to European equities, dollar denominated commodities and commodity names. This downtrend continued into and through the 5:00EST hour with equity markets hovering at their lows by 5:30EST. Despite this movement, Europe's main bourses all held to positive territory with the FTSE +0.2%, DAX +0.2% and the CAC +0.4%.

- In individual equities, British Airways [BAY.UK] said it plans to cut 2K of overall 14K cabin crew jobs. Times article noteed that the airline has already begun setting up contingency plans for potential strike during holiday travel season. Ground staff have already rejected proposals from airline regarding cost cutting and voluntary redundancy programs. Article stated that BA may follow other UK companies by closing its final pension scheme to new employees as current pension deficit has risen to £3B. Lloyds [LLOY.UK] Reportedly planning 1.5K further job cuts (less than 1% of work force)-Sky news. Seeking to close Cheltenham and Gloucester building society unit. Punch Taverns [PUB.UK] Reached agreement for sale of 11 pubs for £30.4M to Greene King for £30.4M. The pubs to be sold are freehold outlets located in central London, the southeast of England and Scotland. The agreement is unconditional and is expected to complete on 1 July. Bowleven [BLVN.UK] Proposed placing of new ordinary shares to raise about $110M (approx 107% of current market cap). Placing is being conducted through an accelerated book-building process. Areva [CEI.FR] Update: Awarded €50M contract for Indian substation operations, will build four substations to support Indian power grid. EADS [EAD.FR] Thai Airways International may seek to cancel its $1.8B order for six Airbus A380s - Bangkok Post. According to the article, Thai Airways believes that the plane is not viable and too expensive. The report cites the Chairman of Thai Airways. Korian [KORI.FR] Plans €70M in capital increase via share placement (14% of market cap). To issue 2 new shares for every 15 currently held. Existing holders can buy new stock at €19/share. Book running to last from June 9-11. Air France [AF.FR] Reports May Load Factor 77.3% v 79.3% y/y. Capacity -5.7%, Traffic -8.1% v +6% y/y. BNP Paribas [BNP.FR] Sells $300M of 2012 floating-rate notes. Porsche [PAH3.GE] Company is now said to be in "advanced talks" about selling a stake of up to 25% to Qatar Investment Authority - FT. Wendelin Wiedeking, Porsche's chief executive, is talking to the Qatar Investment Authority (QIA) about taking a stake of up to 25% in its holding company, people familiar with the talks said. They said QIA was examining Porsche's books and a deal could be announced within weeks. Verbund [VER.AS] S&P places "A" ratings on watch negative. Move comes after co. purchase of Re Hydro from E.On. Reminder: Earlier in session: E.on reportedly sells 13 hydro-power facilities to. UBS [UBSN.SZ] (SZ) Swiss Fin Min: Held serious talks with several parties regarding various transaction options for gov't stake in company. No decision yet on UBS convertible notes, will take a decision at appropriate time. Unilever [UNA.NV] CFO: To boost spending on advertising operations from Q2 2009; Does not plan share buybacks in 2009. Remain on track for targeted savings and staff reduction plans. Heineken [HEIA.NV] Exec: Group is not immune to global market downturn; To decrease UK headcount by more than 15%. Will seek to maintain pricing levels for UK sales, Heineken brand to remain cornerstone.

- Speakers: ECB's Liikanen commented that some signs of stabilization in global economy with worst likely behind at this time. However he cautioned that there would not be any rapid recovery in global economy. He commented that the USD recent strength was stopped due to an increase in risk appetite. Liikanen noted that the Euro-Zone short term outlook remained bleak coupled with low inflation in coming months. He noted that large volume of credit losses remained undiscovered and that one must ensure liquidity and solvency of banks. - ECB interest rates at "exceptionally low level".
Large public debt raises inflationary expectations and real interest rates. - Reiterates that ECB never recommits and that 1.0% has not been decided to be the lowest level of interest rates. ECB's Papademos staed that current interest rate levels are appropriate for now. He expected European economy to remain weak through year-end but saw signs of stabilization taking hold. High uncertainty remained regarding European economic outlook and the recent rise in bond yields need not reflect rate hike expectations Chinese Vice Foreign Min commented that talk of "dumping" USD is not realistic and that the major currencies should be stable |||Japan's government raises its view on Coincident Indicators, things getting lees worse China's National Social Security Fund (NSSF) commenced its $80B allocation process in Apr for investments into the global capital markets Hungary Central Banker commented that one needs strong evidence that risk appetite was improving prior to policy change Latvian Fin Min stated that he expected the IMF to wait until final budget cuts were passed before approving any new aid package to country. Would continue updating Euro zone ministers on all activities regarding the budget and IMF talks. Lastly, duly noted that any devaluation of Lat currency was out of the question and never discussed Russia Central Banker Ulyukayev stated that Russia might accelerate its free floating of Ruble currency Both the German and French Fin Ministers noted that Maastricht Stability Pact criteria must be maintained Reportedly, Japanese govt abandons its long-held FY2011 primary surplus objective and target to bring its primary budget balance into the black "within 10 years BoE's Tucker commented that he w against committing to low rates for extended period of time. He noted that the medium term economic outlook remained 'highly uncertain' and that a sense of perspective was needed on 'green shoots'. He cautioned that bank lending remained subdued and commented that it was unclear if banks can create credit necessary for economic recovery. It would take until Q3 to get a better perspective on the economic growth path. Tucker also commented that the BOE's Quantitative Easing policy (QE) could be easily reversed as it was implemented.

- In currencies: The USD price action was back in sync with commodities. Oil moved higher during the European morning and traded above $69.00/barrel. Dealers noted that continued hops that 'green shoots' would spring up. Chatter circulated that China's industrial production data expected out on Jun 11th would exceed consensus expectations of 7.7%. EUR/USD tested 1.3965 before retreating back below the 1.39 handle. Various government speak offset the USD's earlier soft tone in the session. China's Vive Foreign Min comment that no 'dumping' of dollars did curb its intial weakness. Various European central bankers reiterate that 'high uncertainty' remained on the global growth outlook.

- GBP firmer on alleged M&A flows with dealers citing the potential Blackrock-Barclays deal rumored to be taken place. GBP/USD tested 1.6175 before paring its session gains. EUR/GBP cross re-approaching the 0.8600 area.

- The JPY showed little initial reaction to reports that the Japanese gov't abandoned its long-held FY2011 primary surplus objective and moved the target out ten years. USD/JPY holding below the key Aug downtrend resistance line of 99.00. The pair ended the European morning at 98.20.

- In Fixed Income: After some brief respite supply resumed in earnest this morning with encouraging results. European Government Bond markets successfully digested just under €4B in peripheral supply from Austria and the Netherlands whilst Gilt markets absorbed £5B in 5% 2014s in an auction covered an impressive 2.25 times. German and US yield curves have undergone some corrective steepnening this morning, with good buying returning in short dated issues, whilst the UK yield curve is a touch flatter at the time of writing with 2s10-s below 240bps for the first time since late April

- In Energy: Russia's Novatek [NVTK.RU] said it sees natural gas demand recovering in 2011-2012.

- In commodities: Indian Steel Secretary: Apr-May Steel Output 9.2M tons (+2.4% y/y), Demand 8.2M tons (+5.9% y/y)

- Credit Crisis/Economy: NY Times examines if the rise in gas prices could slow the economic recovery. The article noted that US gas prices have risen 41 days in a row to a national average of about $2.62/gallon vs. the low of $1.62 at the end of 2008. It noted that due to refinery problems gas prices are especially high in the Midwest and observed that Michigan, the state with the highest unemployment rate, was now paying the highest gasoline prices. The national rise in gasoline prices is far larger than the normal seasonal increase and it is pulling billions of dollars from the pockets of drivers. Reportedly, a US Bailout Congressional Oversight Panel stated that bank stress tests might have to be repeated. Tests should be repeated if unemployment rate exceeds 8.9% average for 2009 bailout and as long as banks continue to hold toxic assets. Panel noted regulators should be able to impose stress tests to promote healthy banking system. Between formal stress tests, banks should hold internal tests and share results with regulators


NOTES

- Focus on health of financial sector. U.S. Said to Plan Approval Today for 10 Banks to Repay TARP yet US Congressional panel believes that bank stress tests might need to be repeated if avg unemployment rate exceeds 8.9% for 2009 .

- Chinese Vice Foreign Min: talk of "dumping" USD is not realistic; major currency exchange rates should be stable. Reiterates that a super sovereign currency was being discussed at an academic level

- Major concerns arising that rising U.S. bond yields, energy prices might curtail any economic recovery. Overall sentiment remains that pace of economic weakening has slowed, but the economy has not turned the corner just yet

- Looking Ahead: US $65B in auction commences today with $35B in 3-year notes.

- 7:30 (US) May NFIB Index of Small Bus Optimism: No expectations v 86.8 prior

- 8:00 (BR) Brazil Q1 GDP (IBGE) Q/Q: -1.9% expected v -3.6% prior, Y/Y: -2.8% expected v 1.3% prior, GDP Accumulated: No expectations v 5.1% prior

- 10:00 (MX) Mexico May Consumer Prices M/N: -0.3% expected versus 0.4% prior; Y/Y: 6.0% expected versus 6.2% prior; CPI Core M/M: 0.3% expected versus 0.4% prior

- 10:00 (US) Apr Wholesale Inventories: -1.2% expected v -1.6% prior

- 10:00 (US) June IBD/TIPP Economic Optimism: 50.0 expected v 48.6 prior

- 10:30 (US0 Treasury's Geithner to testify before Senate Appropriations subcommittee

- 13:00 (US) Treasury to sell $35B 30-year Notes