European Market Update: Rising risk appetite buoys energy, metals and equities; weakens USD sentiment


ECONOMIC DATA

- (TH) Thai Benchmark Interest Rate leaves interest rates unchanged at 1.25%, as expected

- (EU) June EU 25 New Car Registrations: +3.0% v -4.4% prior; first increase in 14 months

- (JP) Japan June F Machine Tool Orders Y/Y: -72.8% v -73.1% prior

- (HU) Hungarian May F Industrial Output M/M: 2.6% v 2.6% prior, Y/Y: -22.1% v -22.1% prior

- (CZ) Czech June PPI (Industrial) M/M: 0.0% v 0.1%e; Y/Y: -4.4% v -4.4%e

- (CZ) Czech May Export Price Index Y/Y: 0.3% v 2.0% prior, Y/Y: -4.0% v -1.3% prior

- (TU) Turkey Apr Unemployment Rate 14.9% v 15.3%e

- (SZ) Swiss May Retail Sales (Real) Y/Y: -1.4% v 1.2% prior

- (SW) Swedish June Average House Prices (SEK): 1.88M v 1.87M prior

- (DE) Danish June Wholesale Prices M/M: 0.8% v 0.4% prior; Y/Y: -9.3% v -8.6% prior

- (IT) Italian June Final CPI (NIC incl. tobacco) M/M: 0.1% v 0.1%e; Y/Y: 0.5% v 0.5%e

- (NO) Norwegian June Trade Balance (NOK): 22.4B v 22.2B prior

- (IT) Italian June Final CPI - EU Harmonized M/M: 0.2% v 0.2%e; Y/Y: 0.6% v 0.6%e

- (RU) Russian June Industrial Production Real M/M: 4.5% v -2.10% prior, Y/Y: -12.1% v -14.30% e

- (SP) Spain 2Q House Price Index Q/Q: -1.9% v -3.0% prior, Y/Y: -8.2% v -6.5% prior

- (UK) June Claimant Count Rate: 4.8 v 5.0%e

- (UK) June Jobless Claims Change: 23.8K v 41.3Ke

- (UK) May Avg Earnings inc bonus 3M/Y/Y: 2.3% v 2.1%e

- (UK) May Avg Earnings ex bonus 3M/Y/Y: 2.6% v 2.6%e

- (UK) May ILO Unemployment Rate (3mths) 7.6% v 7.4%e

- (UK) May Manu.Unit Wage Cost 3Ms/Y/Y: 7.1% v 9.0% prior

- (EU) June Euro-Zone CPI M/M: 0.2% v 0.2%e; Y/Y: -0.1% v -0.1%e; CPI Core Y/Y: 1.4% v 1.5%e

- (IC) Iceland Q2 unemployment: 9.1% v 7.1% q/q

- (SA) S Africa May Retail Sales Constant Y/Y: -4.2% v -5.1%e


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- Equity markets in Europe are on track to print a third consecutive day of gains. A muted close to the NY session yesterday was shrugged off by Asian bourses that continued to rack up significant gains (ex-Japan following an interest rate decision and financial sector profit taking). In European trading, financials have continued their post-Goldman Sachs [GS] rally with bourses and exchanges LSE [LSE.UK] and Deutsche Bourse [DB1.GE] outperforming. Tech sector strength following Intel's [INTC] post-market earnings in NY and ASML's [ASML.NV] better than expected pre-market figures pushed that sector to the top of the EuroStoxx50. Rio Tinto's [RIO.UK] Q2 production release, seeing a rise in Chinese steel demand in H2 and putting a 8% increase on ore output in Q2 sharply rallied the both the mining/mineral sector along with heavy manufacturing and steel names. On the back of this broad sector sentiment, equity markets quickly pushed to the +1.00% within 30 min of trade before entering a trading range between +0.80-1.25%. Trends into and through 4:00EST hour continued a linear upwards trajectory swallowing mixed economic data in stride. Better than expected UK jobless claims for June at 4:30EST served as a further catalyst for equity appetite across Europe. Sector performance levels remained consistent with those seen on the open, tech, financials and basic materials continuing their broad outperformance. Volume levels have posed a recovery, specifically on the CAC40 with that index trading at nearly 40% above its average level. The vast majority of this added turnover coming in tech names Alcatel-Lucent [ALU.FR] and STMicrolectronics [STM.FR] churning a combined 20M shares by 5:15EST.

- In specific stocks: Rio Tinto [RIO.UK] provided a Q2 production update, noting that global iron ore output is +8% y/y in the quarter to 45.2M metric tons. Rio reaffirmed its FY09 iron ore production guidance of around 200M tons. It also noted that markets remained tough in Q2, and that it expects Chinese steel demand to recover in the second half as it continues to align output with demand. In addition, Rio said about half the iron ore produced this calendar year has been sold on spot basis. ASML [ASML.NV] reported a Q2 net loss of €104M, a bit better than the expected loss of €110M. Revenue also beat with €277M, above the €228.3M consensus. The company guided Q3 revenue at €450M compared to estimates of €405.6M and gross margins at 30%. It sees an end of Q2 backlog around €1.06B versus €853M q/q. ASML's CFO said customers have returned to the market, although the recovery is not in full swing quite yet. SKF [SKFB.SW] reported a Q2 net of SEK323M, above consensus of SEK207M. Revenues were SEK14.2B, below expectations of SEK14.8B. Demand for SKF products and services is expected to be significantly lower across the board on a y/y basis. Manufacturing levels will be significantly lower y/y, relatively unchanged compared to Q2. Land Securities [LAND.UK] provided an interim management statement, noting that while vacancy rates are still rising, businesses are more willing to sign new leases. ICAP [IAP.UK] reported Q2 revenue of +10% y/y. Average daily electronic broking volumes were -31% y/y to $582.6B in the quarter, while average daily spot FX volumes on EBS were -37% y/y to $134.5B. LSE [LSE.UK] provided interim statment, noting that Q1 revenue would be £161.9M (-8% y/y). JD Wetherspoon's [JDW.UK] provided a trading update, noting 11-week same-store sales are -0.8% y/y and total sales +3.1% y/y. Like-for-like sales in the equivalent six-week period this year decreased by 2.9%. In the remaining five weeks, like-for-like sales increased by 2.0%. BT [BT.UK] UK Pension Regulator has brought in outside advisers to review frims pension valuations, according to FT. At the end of March, the group put its pension shortfall at £3.9B without a complete actuarial valuation. Complete valuation is necessary requirement prior to regulator coverage of funding gaps. VW [VOW.GE] is considering a €1B investment to expand Mexican manufacturing facilities, looking to build one additional new vehicle model at the factory in 2010. Suedzucker [SZU.GE] Reported Final Q1 Rev €1.41B in line with prelim €1.41B as given June 25, 2009. Confirmed FY09 outlook for Rev and Op profit. Confirms Q1 op profit €88M v prelim €88M as given June 25. Q1 Net (after minorities) put at €47.6M v prelim €65M as given June 25.

- In speakers: Commerce Secretary Locke commented that China needs to shift from export-led growth and move towards exchange rate flexibility. He reiterated that a more flexible yuan rate could speed recovery. He noted that US-China trade imbalance were unsustainable. US companies are losing billions to China from intellectual property theft. South Korea Investment Fund (KIC) said it would purchase inflation-hedging assets and invest in property, commodities, hedge funds. It noted that alternative assets would help hedge against inflation. BoJ Shirakawa commented that the Bank of Japan might extend its unusual measures if needed. It noted that today's decision extended the unusual steps by another three months. He did note that any prolong funding could cause big swings in economy. The BOJ would review corporate funding steps if financial conditions to improve. The BOJ chief noted that corporate funding remained tight but was improving. Lastly he did comment that uncertainty over economic and financial markets outlook remains high . Russian Central Bank Deputy Head Melikyan commented that the ruble currency rate at 35 per dollar "would not have a significant impact". The official added that the recent decline in Ruble FX rate was not surprising given decline in oil prices from $73 to the $60 level. He added that he saw no alternative to USD and EUR in near future

|| China FX Regulator eases restrictions on Outward Direct Investment, effective Aug 1st. Companies would be able to send investment funds abroad without approval. Indian Fin Sec commented that it would attempt to reduce fiscal deficit by 1.5% annually over the next two years. German BGA Group warned of increased credit risk in Germany and that -the credit crunch likely to worsen dramatically in 2010. The Export group noted that its expected 2009 exports to decline by 18% y/y. It was cautious to note that it was too early to say that worst of the economic and financial crisis was over at this time.
ECB's Constancio rehashed the standard ECB views in which interest rates are at the appropriate level and that the ECB never pre-commits on interest rates.

- In currencies: the greenback opened the European session on a soft note as risk appetite continued to grow following key earnings reports from Goldman Sachs and Intel. The USD was also weakened by the notion that the South Korean sovereign fund KIC would purchase inflation-hedging assets including property and commodities. Energy and metals zoomed higher as the EUR/USD tested the 1.4070 level where it encountered some option related selling. Overall the euro continues to maintain a consolidating tone as its implied volatility is currently at its lowest levels since last September. The CAD and AUD pairs were firmer on the rising risk appetite with AUD/USD approaching 0.80 area and USD/CAD testing the 1.13 level. NYMEX Aug crude up around $1 per barrel at $60.50 as the NY morning approaches. Spot Gold around the $930/oz.

- In Energy/commodities: Nigerian rebel group MEND has declared a temporary cease-fire be for 60 days. The statement was related to the release of MEND's leader Okah. Kuwait Official comented that OPEC would likely to cut its output supply again if oil fell below $55/bbl. The official noted that oil might reach $100/bbl in 2010 on a weaker USD.

- In Fixed Income Supply: Bear steepening has been the constant theme in government bond markets this morning in Europe, with longer dated issues bearing the brunt investors re-rotation into risk. Gilts have unsurprisingly underperformed Bunds and Treasuries following better than expected headline employment reports out of the UK. US2s10s is firmly back above 250bps, German 2s10s is inching above 205bps whilst the UK yield curve has 265bps in its sights. Much attention was paid to an article from Ambrose Evans Prtichard in the Daily Telgraph suggesting France's credit rating could be under threat as a result of President Sarkozy's intention to issue a super bond. of an as yet undisclosed size, for as yet undetermined purposes. Yield spreads are on French debt are nonetheless steady against Bunds with the 10y OAT 43bps cheap to the European benchmark, unchanged from yesterday's close.

- In the papers: London Telegraph: France's `special bond' raises doubts over AAA rating. The article noted that Fitch Ratings was paying close attention to French plans for a "special national bond" to raise up to €80B for projects outside the normal budget. While there is no immediate threat to France's elite `AAA' rating, the agency said concerns might mount if the country failed to map out a clear path towards fiscal discipline over the next year or so. President Nicolas Sarkozy plans to use the `national bond' to fund research, hi-tech industries, and green energy, railways, and possibly defence, raising suspicions that the gambit is just a second "stimulus plan" dressed up as investment.


NOTES

- Risk appetite continues to rise aided by key US corporate earnings. Goldman Sachs on Tuesday and Intel after the close yesterday.

- China currency reserves rose in June to a record $2.13 trillion. Yuan loans rose 34.4% y/y. M2 money supply up 28.5% y/y.

- China FX Regulator SAFE eases restrictions on Outward Direct Investment, effective Aug 1st

- Korea sovereign fund KIC to buy more property and commodities to brace for inflation risk.

- New Zealand Fin Min reiterated the view that it would prefer weaker NZD currency given current account def

- BOJ keeps rates steady as expected, but upgrades economic assessment for the third straight month. BOJ extended special financing facilities for three months instead of six.

- France 'special bond' may raise doubts of AAA rating - UK press


Looking Ahead

Tomorrow China Q2 GDP released.

- 7:00 (US) MBA Mortgage Applications w/e Jul 10th: No expectations v 10.9% prior

- 8:30 (US) June Consumer Price Index M/M: 0.6%e v 0.1% prior, Y/Y: -1.5%e v -1.3% prior

- 8:30 (CA) Canadian May Manufacturing Shipments MoM -2.50% e v -0.10% prior

- 8:30 (US) June CPI Ex Food & Energy M/M: 0.10% e v 0.10% prior, Y/Y: 1.70% e v 1.80% prior

- 8:30 (US) June CPI Core Index: No expectations v 218.91 prior

- 8:30 (US) June Consumer Price Index NSA: 215.5e v 213.856 prior

- 8:30 (US) Jul Empire Manufacturing: -5e v -9.41 prior

- 9:15 (US) June Industrial Production -0.6%e v -1.1% prior

- 9:15 (US) June Capacity Utilization 67.9%e v 68.3% prior

-10:00 (UK) BoE reverse Gilt auction