European Market Update: European bourses shake off China sell-off for now; BOE sees inflation under the 2% target for years to come


ECONOMIC DATA

- (IN) Indian June Industrial Production: 7.8% v 3.8%e

- (FR) French Jun Current Account: -€3.5B v -€2.2B prior

- (FR) French Jul Consumer Price Index M/M: -0.7% v -0.5%e ; Y/Y: -0.4% v -0.8%e; CPI Ex Tobacco Index: 117.80 v 117.72e

- (FR) French Jul CPI - EU Harmonized M/M: -0.5% v -0.4%e; Y/Y: -0.8% v -0.8%e

- (SP) Spanish Jun House transactions Y/Y: -25.5% v -32.2% prior

- (IT) Italian Jun CPI (NIC incl. tobacco) M/M: 0.0% v 0.0%e; Y/Y: 0.0% v 0.0%e

- (IT) Italian Jul CPI - EU Harmonized M/M: -1.2% v -1.2%e; Y/Y: -0.1% v -0.1%e

- (NO) Norwegian Jun Retail Sales M/M: -2.5% v -0.5%e; Y/Y: 2.3% v -0.6%e

- (UK) Jul Claimant Count Rate 4.9% v 4.9%e; Jobless Claims Change: 24.9K v 28.0Ke

- (UK) Jun Avg Earnings inc bonus 3M/Y/Y: 2.5% v 2.4%e; Avg Earnings ex bonus 3M/Y/Y: 2.5% v 2.5%e ; Manu. Unit Wage Cost (3Ms/Y/Y:) 6.6% v 7.3% prior

- (UK) Jun ILO Unemployment Rate: 7.8% v 7.7%e

- (EU) Jun Euro-Zone Jun Ind. Prod M/M: -0.6% v 0.2%e; Y/Y: -17.0% v -16.4%e

- (SA) South Africa Jun Retail Sales Constant Y/Y: -6.7% v -4.5%e

- (UK) Bank of England Quarterly Inflation Report: Might miss hitting 2% inflation target amid slow economic recovery. Inflation likely at 1.5% level in two years time

- (GR) Greece Q2 Preliminary GDP Q/Q: 0.3% v 0.1%e, Y/Y: -0.2% v -0.4%e


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- In equities news overnight: European markets opened mixed despite the slump in the mainland china indices. European indices were initially weighed down by banks and miner names on the risk aversion sentiment. The IEA July monthly report provided a floor for the time being as energy-related names recouped earlier losses. Overall the later part of the European price action settled down ahead of the Fed interest rate decision, which overshadowed quarterly reporting data. The indices moving into positive territory as the NY morning approaches with German bourses outperforming. DAX +0.3% at 5,300, Euro Stoxx 50 +0.1% at 2,654, CAC-40 index +0.1% at 3,460 and the FTSE 100 index unchanged at 4,672.

In specific stocks; Nestle [NESN.SZ] reported H1 Net CHF5.1B above CHF4.9B estimates, Rev CHF52.3B v CHF52.7Be . || ING [INGA.NV] Reported Q2 Net Profit €71M (ex items) v €362Me, Underlying Profit €229M v €338Me, Does not declare interim dividend || E.On [EOAN.GE] Reports H1 Adj Net €3.46B v €3.1Be, Rev €42.5B v €45Be. Expects FY Adj Net income -5 to -10% y/y due to higher financing costs || BHP.AU: Reports FY09 Adj Net $10.7B v $10.2Be, Rev $50.2B v $49.8Be

- Speakers: ECB's Liikanen commented that the economic freefall was over and reiterated that global growth to begin in China and India region. World avoided a prolonged depression. Financial market recovery had begun, however, the global crisis was not yet over even though conditions improved. Uncertainty still seen over "green shoots" || Bank of England Quarterly Inflation Report noted that the central bank might miss hitting 2% inflation target amid slow economic recovery.
BOE's King noted that risks that banks might curtail lending as the pace of recovery highly uncertain. He did note that the economy should resume growth towards the end of 2009 and that the risk of sustained economic contraction were reduced. Upward pressure on CPI due to weaker pound, energy prices yet CPI likely to fall below 1% in autumn 2009. QE should boost inflation and spending over time || UK Business Sec Mandelson commented that the UK has to address Gov't deficit after the end of the current recession. He noted that the UK needs to rebalance public finances over medium term || IFO stated that the Euro-Zone Q3 Economic Sentiment was 63.6 versus 55.1 q/q and noted that expectations were improving in Germany, France and Holland. The IFO noted that experts see key lending rates unchanged for the next six months; expect rising capital market interest rates. Experts see USD, GBP and JPY as slightly undervalued compared to Euro and do not expect USD to rise against Euro over the next six months

- In Currencies: The European morning began with a renewed sense of risk aversion amid concerns over China and its ability to be the economic engine of global growth. The Shanghai Composite dropped by 4.7% to test below the 3,200 area for one-month lows. The JPY and USD benefited from the reduction in risk appetite with European and commodity-related currencies bearing the brunt of the price action. EUR/USD tested below the 1.41 area before consolidating and USD/JPY probing towards the lower spectrum of the 95 neighborhood before moving back to 95.70 as the NY morning approached. .

- The BOE quarterly inflation report was dovish in tone for both growth and inflation outlook. The GBP/USD near the lower end of its session range with GBP/USD just above the 1.64 handle and EUR/GBP holding above the 0.86 area.

- AUD and CAD softer on the back of weaker energy and metal prices. AUD/USD testing below the 0.82 level while USD/CAD trading in the mid-1.10 area. Sept NYMEX crude futures off around 20 cents to trade at $69.30/berrel after probing below the 69 handle earlier today.

- In Fixed Income: Government bonds have benefited from a risk averse session, with Gilts receiving particular lift following a dovish quarterly inflation report out of the BoE. The UK yield curve has steepened significantly with 2s30s through 320bps and 2s20s approaching 270bps In Germany, the Bundesbank sold €4.85B in a second tap of the on the run 3.5% Bunds, in an auction covered a healthy and above average 1.8 times. Ahead of the 10y note refunding treasuries are modestly bid, with the new 10y Note in the middle of its daily range, yielding 3.67% in the when issued market.

- In Energy: IEA Monthly report saw 2009 World oil demand rising by190K bpd and 2010 oil demand up 70K bpd over their prior forecasts, citing demand from China. The IEA now sees 2009 global oil demand at 83.9M bpd and 2010 at 85.3M bpd. It also noted that July Global oil supply was up 570K bpd to 85.1M bpd. For 2010 it now sees global oil demand growth at 1.3M bpd versus 1.4M bpd prior view. Stronger Asian demand to offset weakness in US and Europe and noted some slight evidence of global recession was bottoming ||

- In the papers: According to London Telegraph's Ambrose Evans-Pritchard recent Chinese data raise doubts about the strength of global trade and whether the world can rely on China's growth to power recovery. Article noted that recent drop in the Baltic Dry Index supported speculation that that China has stopped building up stocks of metals and other commodities. Article noted that excess liquidity in China has been a key driver of global markets since the rally began in March. And that the Chinese real economy cannot absorb the excess liquidity, so it is leaking into asset speculation.


NOTES

- China's Shanghai Composite hits one-month low at 3,112

- ECB's Liikanen reiterated the view that the global economic/financial crisis was not yet; but situation has improved.

- FOMC will be highly anticipated in their statement and views on quantitative easing. One dealer noting that the Fed must communicate enough inflation fighting commitment to depress Long Term yields while not adding to Short Term pressures for market tightening


Looking Ahead

- 7:00 (US) MBA Mortgage Applications No expectations versus 4.4% prior

- 8:00 (NO) Norwegian Deposit Rates: No change expected from the current Deposit level of 1.25%

- 8:00 (PD) Current Account: €164Me v €207M prior; Polish Jun Trade Balance (Euro) -90 e v -58 prior; Exports: €8.02B e v €7.6B prior; Imports: €8.03Be v €7.6B prior

- 8:30 (US) June Trade Balance: -$28.7Be v -$26.0B prior

- 8:30 (CA) Canadian Jun Int'l Merchandise Trade -0.7B e v -1.4B prior

- 8:30 (CA) Canadian Jun New Housing Price Index MoM 0.00% e v -0.10% prior

- 10:30am DoE Crude Oil/Gasoline/Distillate Inventories

-13:00 (US) Treasury to sell $23B in 10y notes in refunding

- 14:15 (US) FOMC Rate Decision