European Market Update: IEA lowers its medium-term global oil demand due to recession; China and Hong Kong sign agreement for CNY trade settlement


ECONOMIC DATA

- (SP) Spain Apr Total Housing permits M/M: -6.8% v 10.3% prior; Y/Y: -63.2% v -52.8% prior

- (SP) Spain May Retail Sales Y/Y: -7.8% v -8.4% prior, Adj Real Retail Sales Y/Y: -.63% v -7.0%e

- (SP) Spain CPI (EU Harmonized) Y/Y: -1.0% v -1.2%e

- (HU) Hungarian May Unemployment Rate: 9.8% v 10.0%e

- (UK) May Net Consumer Credit: £0.3B v £0.3Be; Net Lending Secured on Dwellings: £0.3B v £1.0Be

- (UK) May Mortgage Approvals: 43.4K v 46.0Ke

- (UK) May Final M4 Money Supply: 0.2% v 0.2% prior; Y/Y: 16.6% v 16.6% prior

- (EU) Euro-zone June Business Climate Indicator: -2.97 v -3.00e; Consumer Confidence: -25 v -30e; Economic Confidence: 73.3 v 71.0e; Industrial Confidence: -32 v -32 e; Services Confidence: -20 v -23e


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- In equities news overnight: European equity bourses opened on a soft note with slight declines in the major exchanges. Asian equity markets foreshadowed this trade with muted downside trade with banking and basic resource sectors faring the worst. Cautious comments from Chinese officials regarding growth, recovery and commodity demand filtered in mining equities. Evans-Pritchard's comments in the UK Telegraph regarding the health and exposure of Chinese banks fueled the weight in that sector. On the European open, mining names continued Asian session trading patterns and served as a break on the FTSE. Analyst upgrades to financial names such as Lloyds [LLOY.UK[, Munich Re [MUV2.GE] and Admiral Group [ADM.UK] moved individual shares higher in a receding sector. Autos traded lower following the continued spat between VW [VOW.GE] and Porsche [PAH3.GE] over the European weekend. Markets trended through the unchanged mark and into positive territory by 3:30EST, on the FTSE, insurance names led the up drift, on the DAX, mixed names including DTE [DTE.UK] and Lufthansa [LHA.GE] moved the uptrend following continued M&A news. In France, builders and material supply firms led the up drift following comments from Nexity [NXY.FR] expanding their estimates for French 2009 construction. Markets accelerated their upward momentum by 3:45EST as energy and commodity prices recovered from their Asian session losses. With little data or fresh market news, bourses trended upwards until May mortgage numbers out of the UK at 4:30EST. Those figures, below expectations halted appetite for equities with the FTSE paring gains the fastest. Continued easing in the Euribor, and in light volumes, positive trending was resumed by 5:00EST. By 5:15EST, the CAC and DAX were retesting their best levels at +0.7% and +0.8% with the FTSE lagging at just +0.4%. Sentiment and trading however remained choppy and markets again moved to pair gains just past 5:30EST, equities at this time continuing to seek direction.

-In individual equities: Rio Tinto [RIO.UK] Chinalco Vice President: No comment on Rio Tinto rights issue, unaware of any talks with Anglo American. Note: overnight the UK Telegraph reported that Chinalco had agreed to participate in Rio Tinto's $15.2B rights issue. Last week the Telegraph reported that Anlgo American was open to the possibility of talks with Chinalco as a takeover defense against the Xstrata approach (specifically Brazilian ore operations MMX). Last week Xstrata launched an unsolicited bid for Anglo, stating that synergies could be in the billions of USD (merger valued at £41B). || Cobhams [COB.UK] Cobham-Northrop Grumman Team Wins US Army VIS-X Contract Worth Up To $2.4B. The total value of the 10-year ID/IQ contract has an anticipated not-to-exceed ceiling of $2.4B, of which Cobham's share is fifty per cent. || Vodafone [VOD.UK] May seek to acquire T-Mobile UK - FT. Note: On 6/17, it was reported that Deutsche Telekom was not in talks to sell T-Mobile UK after the Guardian previously reported that France Telecom placed an offer for the unit. || E.On [EOAN.GE] May be fined by European Commission for colluding with Gaz de France by dividing natural gas markets - Der Spiegel. Fine may be equal to up to 10% of annual revenue. EU investigating operations following construciton of gas pipeline that may have sought to carve out operating territories at the exclusion of rivals. || Lufthansa [LHA.GE] Decision regarding Austrian Air reportedly to be delayed -Der Standard. Reminder: On 2/20, LHA.GE: Reaffirms commitment to takeover offer for Austrian Airlines at €4.49/share (€231.3M for 58.4% outstanding stake). || UBS [UBSN.SZ] To pay approx $2.8-4.5B in final settlement with U.S. Govt over tax evasion investigations - Sonntag, deal expected within next few weeks. || ITV [ITV.UK] Elizabeth Murdoch - daughter of Rupert Murdoch - is on a short-list for company's CEO spot - Telegraph. || Rolls Royce [RR] [AKER.NO] Sells stake in Norway's ODIM to Rolls Royce for NOK700M. || Serco [SRP.UK] Provides pre-close update: Continues to see significant opportuinities, Signs A$370M contract with Australian Government. || Premier Foods [PFD.UK] Provides interim statement: May and Jun trading was in line with expectations. Expectations for sales and profit for the half year and the full year are unchanged. || Ciments Francais [CMA.FR] Italcementi Abandons merger with Ciment Francais due to "excessive demands" from US investors. Note: US institutional investors own about $500M in Ciment Francais debt, which is also 80% owned by Italcement [IT.IT]. || Nexity [NXI.FR] CEO Alain Dinin: Sees French housing market at 80K units v 75K previous, targeting 10% of market share. || EADS [EAD.FR] Update: Not in need of further capital increase to fund A350 program -La Tribune. Additionally -NTSB is probing the loss of speed and altitude data on two Airbus A330 planes in connection with investigation of the crash of Air France flight 447 off the coast of Brazil. One of the flights being probed was one operated by TAM on May 21, flying to Miami to Sao Paulo as the flight lost primary speed and altitude data for about 5 minutes, which caused the flight crew to use backup instruments. || M6 Group [MMT.FR] Revenue in Q2 to decline faster than in Q1 (-11%) - French press. Les Echos cites interview with Co's CEO De Tavernost. || Dassault Aviation [AM.FR] EADS has no plan to sell stake in Dassault Aviation - La Tribune. EADS has a 46% stake (second largest investor behind French state). || Maurel Et Prom [MAU.FR] Offers €225M euro 2014 bond convertible into new or existing shares. Convertible offering may be raise to €298M. Lazard Natixis is joint bookrunner. || Porsche [PAH3.GE] Rejects ultimatum by Volkswagen and German Lower Saxony state officials regarding merger talks. June 28 PAH3.GE: Volkswagon reportedly gives Porsche June 29th ultimatum on potential merger relationship. Volkswagon gave a June 29 deadline to Porsche over merger plan. Porsche has called such an ultimatum 'damaging.' || Daimler [DAI.GE] CEO: Optimistic worst is behind us, sees no more negative surprises, could see positive developments - Sonntag interview. || Elan [ELN.IR] Novartis is in discussions to acquire a part of company, focusing on drugs for treatment of Alzheimer's and MS - London Times. |

- Speakers: China's State Administration of Foreign Exchange SAFE) commented that the USD might keep dominating global finance as it was supported by strong economy. SAFE noted that any super-sovereign currency needed a tradable market. |||EU's Almunia commented that markets are reacting positively to monetary policy and that the Euro-zone was no longer in an economic free fall. He did expect to see further quarters of negative growth for the EU ahead, which would keep unemployment high for some period of time. He stressed that it was urgent to avoid unemployment from becoming permanently high, stimulus measures must be adopted. Europe would take longer to recover than US from economic crisis and will not have the same pre-crisis growth potential. |||BoJ's S hirakawa commented that monetary policy should respond to bubbles even if there is low inflation. He did note that monetary policy alone cannot prevent bubbles. || China and Hong Kong central bankers signed Yuan trade settlement agreement ||| EU Commission commented that it was premature to think current crisis was over. It also stated that demographic declines would lead to further downsides to GDP growth potential post crisis. Balance sheets in Eurozone remained fragile

- In Currencies: The USD stabilized in the session aided by comments from China currency regulator SAFE in which that any super-sovereign currency needed a tradable market. But finalization of a Yuan trade settlement pact between China and Hong quietly expressed the dollar reserve currency situation. EUR/USD was hugging the 1.40 area throughout the European morning. Interestingly, the conflicting views on China resource reserves was another factor in the quiet price action. A NDRC official commented in the press that China would stop purchasing metals for building up strategic reserves, as the purpose of supporting prices had been achieved. However, Far east press also noted that China was planning to raise its oil reserve by 160% over 5 years to 270M barrels. The USD/CHF was back at 1.09 as continued threat of SNB intervention overhangs upon the market sentimnent ||| Venezuelan Fin Min: A devaluation of the Bolivar is possible, has not yet been ruled out

- In Energy: IEA issued its five-year outlook Report and saw global demand not exceeding 2008 levels until 2012 period. Thus it concluded that lower oil demand postpones threatened 'supply crunch'. The report lowered oil demand estimates for every year through 2013 by about 3M bpd. It saw 2012 Consumption averaging 86.76Mbpd, the first year it will rise above 2008's level of 85.76M bpd. IEA expected global oil demand to avg 87.9M bpd by 2013 v 91.2M bpd view given back in Dec. On the topic of gas the IEA stated that 2008 gas production rose by 8% y/y and 2009 global supply up 4% in 'early 2009. It expressed "Serious concerned that Russia's gas flows to Europe via Ukraine could be cut at any time ||Algerian Oil Min Khelil: Gas demand down 10% y/y nd it would sign pipeline accord next week with Nigeria and Niger|| Today's originally scheduled Iraq oil concession auctions in Baghdad has been delayed until tomorrow due to bad weather which has limited travel into the city || NYMEX Aug crude entering the NY morning in positive territory, above the $69.30 level.

- In Fixed Income Supply: Gilts have outperformed other markets ahead of the BoE's 32nd reverse auction. Today's £3.5B worth of Gilt purchases will push the UK's quantitative easing program through the £100B mark and the September Gilt contract is trading at its best levels of the month, with intraday highs of 118.75, and a low yield of 3.625% for the 10y Gilt in the cash market. Yield curves in Europe are experiencing some bull flattening with UK2s01s moving back below 250bps and 200bps the next stop on the way down in Germany. Bunds have managed to maintain a bid for most of the European morning as the street readies itself to absorb a deluge of supply out of France and Germany later this week. Treasuries have been offered for most of the overnight session but have steadily ticked higher since the European open. Yields are lower across the curve with bull flattening en vogue, as is the case in Europe. The 10y note yields 3.51% at the time of writing.

- Credit Crisis: Telegraph's Ambrose Evans-Pritchard writes China's banks are an accident waiting to happen and concluded that China's banks are veering out of control. The article noted that China can not absorb the $1T 'blitz' of new lending issued since December and money was leaking into Shanghai's stock casino, or being used to keep bankrupt builders on life support. The article concluded that the lending was doing very little to help lift the world economy.


NOTES

- IEA lowers it medium term oil demand forecast due to recession and stated that global demand would not exceeding 2008 levels until 2012 period.

- NDRC official: China will stop purchasing metals for building up strategic reserves, because the purpose of supporting prices has been achieved

- China is planning to raise its oil reserve by 160% over 5 years to 270M barrels - Nikkei

-China's PBoC's Gov Zhou commented that China's GDP growth in Q2 was likely to be "somewhat" stronger than in Q1. PBoC stated that China had a "very stable" foreign currency policy that would not be suddenly changed. Denied that a fall in the amount of US Treasuries held by the PBoC reflected concerns about the dollar.

- European 'soft' data continues to show improvement.


Looking Ahead

Asian bourses ended mixed. European bourses are higher, but U.S. equities are mostly down slightly

- 8:30 (US) Chicago Fed National Activity Index: No expectations v -2.06 prior

- 9:30 (BR) Brazil Primiary Budget Balance: 4.7B expected versus 12.5B prior

- 10:30 (US) Dallas Fed Manufacturing Activity Index: -17.5%e v -21.5% prior