European Market Update: France and Germany move out of recession; rising risk appetite fuels equities and commodities higher; USD maintains soft tone against European pairs


ECONOMIC DATA

- (IC) Iceland Central Bank (Sedlabanki) maintained interest rates at 12.00%

- (RU) Russia Gold & Forex Reserves w/e Aug 7th: $403.4B v $402.5B prior

- (GE) German Q2 Preliminary GDP Q/Q: +0.3% v -0.2%e; Y/Y: -5.9% v -6.6%e; GDP NSA Y/Y: -7.1% v -7.6%e

- (FR) France Q2 Preliminary GDP Q/Q: +0.3% v -0.3%e; Y/Y: -2.6% v -3.2%e

- (AV) Austria Q/Q: -0.4% v -2.7% prior; Y/Y: -4.4% v -4.7% prior

- (CZ) Czech Jun Retail Y/Y: -4.9% v -4.5%e

- (SP) Spain Consumer Price Index M/M: -0.9% v -0.9%e; Y/Y: -1.4% v -1.4%e

- (SP) Spain CPI Core M/M: -1.1% v -1.0%e; Y/Y: 0.6% v 0.6%e

- (SP) Spain CPI EU Harmonized M/M: -0.8% v -0.9%e; Y/Y: -1.4% v -1.4%e

- (SZ) Swiss July Producer & Import Prices M/M: 0.0% v 0.1%e; Y/Y: -6.1% v -5.8%e

- (SW) Sweden Jun Industrial production M/M: -2.5% v -0.8%e; Y/Y: -20.8% v -21.6%e

- (SW) Sweden Jun Industrial Orders M/M: -4.2% v 3.5% prior; Y/Y: -21.3% v -30.2% prior; Activity level: 102.5v 102.3 prior

- (NE) Netherlands Q/Q: -0.9% v -0.7%e ; Y/Y: -5.1% v -4.9%e

- (NE) Netherlands Jun Trade balance: €3.0B v €2.3B prior

- (NE) Netherlands Jun Retail Sales: -4.1% v -8.6% prior

- (SA) South African June mining output -7.3% y/y; Gold production -12.2% y/y

- (EU) ECB publishes Monthly Report: Pace of economic contraction has clearly slowed; risks to growth outlook remain

- (RU) Russia Jul Producer Prices M/M: 1.8% v 1.0%e, Y/Y: -12.5% v -13.5%e

- (EU) Euro-Zone Q2 Advance GDP Q/Q: -0.1% v -0.5%e; Y/Y: -4.6% v -5.0%e


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- In equities news overnight: Equity markets opened on a lighter note following better than expected preliminary Q2 GDP figures out of France and Germany. Those figures, both of which provided positive numbers moved France and Germany out of a technical recession. On the basis of this economic data, equities opened above the flat mark and have generally trended upwards through the European morning. Today's pre-market earnings reports included Anheuser-Busch InBev [ABI.BE], K+S [SDF.GE], Salzgitter [SZG.GE], Tui Ag [TUI1.GE], Aegon [AGN.NV] and Prudential [PRU.UK]. Following solid figures and a dividend raise, Prudential traded higher from the open, despite disappointing earnings and bearish outlook statements, both Salzgitter and K+S turned themselves around and traded higher. Sectors that trended higher include insurance, automotive and basic resources. Euro zone Q2 preliminary GDP at 5:00EST, reading ahead of expectations, but still in negative territory (not breaking out of technical recession) pushed equities to their then range highs. Looking forward to US retail sales, and initial jobless claims in the NY morning, equities have begun to position themselves. Earnings out major US/global retailer Wal-Mart [WMT], also expected in the NY morning is expected to have an effect of European listed retail names. In trading volume, all three major exchanges are printing slightly below their moving averages.

-In individual equities: Anheuser-Busch InBev [ABI.BE] Reports Q2 Net $1.1B v $1.0Be, R$9.5B v $9.5Be. Q2 Organic volumes 105M hls v 106M hls y/y. States that beer industry is not immune to economic pressures. || Prudential [PRU.UK] Reports H1 Op Profit £1.3B v £1.2Be , raises interim dividend to 6.29p/shr. Outlook: While we expect the business environment to remain difficult through the rest of 2009. || Salzgitter [SZG.GE] Reports H1 Pretax Loss €195M v Loss €183Me, Rev €4.1B v €4.3Be; See H2 pretax loss. H1 steel division sales €7.99.9M v €1.61B y/y. || K+S [SDF.GE] Reports Q2 EBIT €18M v €30Me, Rev €739M v €739Me; Demand for fertilizer products remains low. Sees market conditions through H2 remaining difficult. Continues to see large declines in Rev levels y/y in 2009 v 2008. ||

Aegon [AGN.NV] Reports Q2 Net Loss €161M v Profit €9Me, to launch equity capital raise of €1B (about 11% of market cap). || Raiffeisen [RIBH.AS] Reports Q2 Net €22M v €17Me, Pretax €70M v €26Me, H1 tier 1 cap ratio at 8.5% v 8.1% y/y, H1 ROE 4.9% v 5.5% y/y. || AngloAmerican [AAL.UK] Announces divestiture of Tongaat Hulett holding for consideration of $523M. || Valeo [FR.FR] Moody's cuts rating one notch to Ba2 from Ba1; affects €1B of debt. || Aeroports De Paris [ADP.FR] Reports H1 Rev €1.3B v €1.3Be. || Tui Ag [TUI1.GE] Reports Q2 Net loss €537M v loss €140Me, Rev €4.2B v €4.1Be. || RWE [RWE.GE] Reports H1 Net €2.2B v €2.2Be, Rev €24.4B v €25.5Be; reaffirms FY targets. Electricity sales -11.4% y.y, Gas sales -8.3% y/y. || Rheinmetall [RHM.GE] Reports Reports Q2 net loss €41M v loss €48Me, Rev 796M v €790Me. ||

- Speakers: The ECB noted in its monthly report that the pace of the economic contraction clearly slowed. It noted that inflationary expectations remained strongly anchored. It slightly raised its 2010 GDP view to 0.3% from 0.2% prior but noted that Euro-zone economy to stay weak through the rest of 2009, warning

of persistent threats to the recovery from rising unemployment and

rebounding commodity prices. The ECB noted that confidence might improve faster than expected || German Econ Min Guttenberg commented that the positive economic development seen in Q2 might continue into Q3. he stated that the worst of Germany's economic slump might be over and expressed hope that positive economic developments continue. However, he cautioned against immediate reasoning for 'euphoria' regarding domestic economy. || French Gov maintained its view of 2009 GDP decline of 3.0% despite the betterQ2 data reported earlier today || India to sign free trade agreement with Assoc of South East Asian Nations (ASEAN) states, effective Jan 1, 2010 ||

- In Currencies: The USD maintained a soft tone ahead of the European morning as participants noted that the Fed policy makers signaled they will avoid any rush to end their unprecedented efforts to promote lending as they seek to strengthen the economic recovery. The rising risk appetite was fueled further after better-than-expected European GDP data from France, Germany and the Euro-Zone helped push the EUR/USD from 1.4215 and to test European highs of 1.4280. Thus the technical recession appears to be over in Europe. European equities were up over 1% in most major bourses. Dealers noting the 1.4280 area providing some technical resistance in the EUR/USD but noting the retarcements of the current Euro leg up has been limited thus far.

- The GDP data also provided a lift to both energy and metals sectors with NYMEX oil up over a $1 to trade in the mid-$71 range for the Sept contract and over $73 in the Oct futures. CAD and AUD currencies were firmer as a result. USD/CAD was probing the lower end of the 1.08 neighborhood while AUD/USD regaining a foothold above 0.84.

-

- In Fixed Income: With European GDP figures exceeding expectations, and France and Germany remarkably now technically out of recession, risk assets are unsurprisingly rallying in Europe. As a result, government bond markets are being put under pressure although short dated issues are holding up comparatively well after the ECB's monthly report forecast inflation well below the 2% target untill 2011. Cross market spreas are unmoved, as investors digest a variety of cross currents leading into US Retail Sales and Jobless Claims data and the final leg of the Treasury's quarterly refunding . Italy sold €3.35B in 5y BTP's with strong results, whilst the UK sold £450M of 2047 linkers in a mini tender. In emerging markets, Hungary sold HUF58B in 3,5 and 10y bonds above its target of HUF50B. And in corporates. DISH priced its $1B 7.875% 2019s at 97.47% of par.

- In Energy: According to recent FT feature, Russian President Medvedev took a hard line on relations with Ukraine, postponing a dispatch of an ambassador to Kiev until there was a change in "anti-Russian" sentiment

||RBS chief credit strategist Janjuah has reportedly advised clients to take profits in global equity and commodity markets and saw the potential of the "next ugly leg of the bear market"

- In the papers: Recent FT report citing Japanese DPJ front-runner Hatoyama urging Japan to focus on "integration in east Asian community" and away from "US-led market fundamentalism" and that Japan should work toward regional currency union.


NOTES

- France and German out of recession after their Q2 Prelim results; Euro-Zone just missed ending its technical recession.

- Rising risk appetite sends equities and commodities higher in Session; USD and JPY currencies weaker.

- US record high foreclosures in June +7% m/m.


Looking Ahead

Weekly Jobless, Retail Sales, Import Prices, Business Inventories, Natural Gas Inventories, 30-year T-Bond auction are all on the docket

- 8:00 (BR) Brazil Jun Retail Sales M/M: 1.2% expected versus 0.8% prior; Y/Y: 5.8% expected versus 4.0% prior

- 8:00 (PD) Poland Jul CPI M/M: -0.1% expected versus 0.2% prior; Y/Y: 3.4% expected versus 3.5% prior

- 8:00 (IC) Iceland July Unemployment Rate: No estimate versus 8.1% prior

- 8:30 (US) Jul Import Price Index M/M: -0.5% expected versus 3.2% prior; Y/Y: -19.1% expected versus -17.4% prior

- 8:30 (US) July Advanced Retail Sales: 0.8% expected versus 0.6% prior; Ex Auto: 0.1% expected versus 0.3% prior: Ex auto & gas: No estimate versus -0.2% prior

- 8:30 (US) Initial Jobless Claims: 545K expected versus 550K prior; Continuing Claims: 6.300M expected versus 6.310M prior

- Prior 9:30 (SA) South Africa Central Bank (SARB) Interest Rate decision: No change expected from the current rate of 7.50%

- 10:00 (US) Jun Business Inventories: -0.9% expected versus -1.0% prior

- 10:30 Natural Gas Inventories