European market Update: European officials/central bankers maintain cautious yet optimistic view on economy; US payroll release ahead of 3-day US weekend


ECONOMIC DATA

- (FR) French Jul Central Govt Balance: -€109.0B v -€86.6B prior

- (SZ) Swiss Aug CPI M/M: 0.1% V 0.2%e; Y/Y: -0.8% v -0.7%e

- (DE) Danish Jun Industrial Production (ex ships) M/M: 0.3% v -0.6% prior; Industrial Orders (ex ships) M/M: 8.1% v -31.7% prior

- (IT) Italy Jun Trade Balance: -€ 631v €1.19B prior, Trade Balance EU: -€779M v €631M prior

- (IC) Icelandic GDP Q/Q: % v - 3.6% prior, Y/Y: % v -3.9% prior

- (UK) Q2 construction output volume Q/Q: -0.5% v -2.2% prior


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- In equities news overnight: European bourses opened to the positive side following a sharply positive close out of Asian exchanges, most specifically within mainland China. Just at the open of trading (3:00EST), commentary from a Chinese Currency regulator within SAFE announced new FDI regulations. Amongst those new rules, lock up periods for FDI were cut and figures on ytd approved capital were released. On this data, the Hang Seng rallied sharply on what had been a relatively mild session. This appetite carried into US futures and European equities. Financials, miners and auto's showed the best gains on a mix of corporate news, sentiment and demand expectations. Individual news included electric car jv between Peugeot [UG.FR] and Mitsubishi [7211.JP], Daimler [DAI.GE] reaffirm cost cutting and operational levels, Areva [CEI.FR] announcing further interest in its T&D units and Rio Tinto's [RIO.UK] iron ore CEO commenting on on-going iron ore operations. Equities maintained their positive footing through the European morning on relatively solid volume levels.
Markets continue to eye the US Aug nonfarm payroll release seen at 8:30EST and continue to position themselves ahead of that number.

-In individual equities: Rio Tinto [RIO.UK] Iron Ore CEO Walsh: Iron ore spot prices have eased to about $80/ton from $100 in early Aug; Price ease reflects China's steel price; Longer-term resources demand remains unchanged. Ore operations "running flat-out", at full capacity. || Peugeot [UG.FR] Mitsubishi Confirms Peugeot JV; Considering developing electric car for Euro markets. Vehicle to be based on Miev platform. Production seen beginning in Oct of 2010. Vehicle will be marketed under Peugeot-Citroen label. || Kloeckner [KCO.GE] Announces €200M (25% of market cap) capital hike; Seeking to place 20M no-par value shares. Proceeds from operations to be used for acquisitions and to cover internal capital needs. To increase share capital by €50M. || Daimler DAI.GE: CEO Zetsche: 2009 savings will significantly exceed €4B target - Bild. Sees continuation of difficult car market into 2010, have no plans for additional downsizing programs.
States that due to size and market share of firm, will do better in 2010 than in 2009. || Alcatel Lucent [ALU.FR] Underwriters exercise over allotment option in convertible bond offer. Total issue size is increased to €999,999,999.29 corresponding to 309,597,523 OCEANEs. || Areva [CEI.FR] Reportedly CIC seeking to make investment in the firm -Les Echols. Reportedly firms are in talks for stake in T&D unit. Note: T&D unit is groups electrical transmission and distribution network. || Elan [ELN.IR] : US judge ruled that company breached Biogen TYSABRI agreement. Elan has until Sept 28 to remedy its breach of the agreement. || Royal Dutch Shell [RDSA.UK] S&P cuts ratings one notch to AA from AA+ (one notch cut); Outlook stable. || RBS/Lloyds [LLOY.UK] Bank along with RBS seeking to take stakes in companies that hold repossessed properties -Times. Article states that banks planning 'multi million pound' investment in property firms that specifically target buying distressed assets. || Deutsche Telecom [DTE.GE] In Discussions to sell T Mobile UK unit; Vodafone among possible suitors- FT. Reports Vodafone, France Telecom, and Telefonica of Spain are all interested in the unit. || K+S [SDF.GE] Reportedly strength in shares attributed to rumors of takeover interest/chatter. ||

- Speakers: ECB's Trichet commented in an TV interview that he saw increasing signs of economic stabilization but reiterated the view that it was too soon to call for end of economic crisis as uncertainty remained high. Thus he repeated yesterday's theme that the recovery would be uneven and there was no room for complacency. Trichet reiterated that ECB would not pre-commit to any action (interest rates or exit) but would act swiftly and decisively if necessary. ECB has exit strategy and would implement the plan into action when the appropriate time comes. Exit strategy did not include interest rate considerations. ECB has a set of criteria, which would decide its exit strategy path, but all information was not currently available. Policy tools are set to allow smooth exit. Broad money more relevant than liquidity; to exit when ECB liquidity hits broad money supply; when normal linked between liquidity and broad money resumes || ECB's Stark commented that unsustainable fiscal policy was an upside risk to price stability. Government and central bank coordination on exit strategy is not an option/ Stark echoed Trichet's comment that there were signs the global recession was bottoming out, but uncertainty remained high. Massive central bank and government steps had been effective. Exit strategy likely to be a main challenge to price stability || ECB Weber commented that global stimulus and interest rate cuts were unconventional measures to stabilizing financial markets and real economy . He noted that global recession was bottoming out and the strain in banking and financial markets were abating || IMF Strauss-Kahn stated that risk that stimulus withdrawal occurred too soon and jeopardize economic recovery remained. Economic recovery was fragile and could stall. A premature exit from accommodative monetary and fiscal policies were a principal concern. The IMF added that it continued to see the USD as unrivaled safe haven asset || China's Currency regulator SAFE announced new rules for foreign direct investment to attract medium and long term capital. SAFE cut the lock up period for foreign funds and insurers and raised QFII investment limit to $1.0B from $0.8B prior. The regulator noted that it had approved $15B for QFII program to date || Polish Government Advisor Boni commented that the upward spiral in public debt was difficult to manage and that State asset sales werekey to reducing borrowing levels. The advisor remained cautious and concerned regarding Poland's Q3 growth rate and saw Q3 GDP flat to +0.5% and growth overall should pick up modestly. The country's main dangers was public debt exceeding 55% of GDP and avoid a debt 'spiral' that would trigger austerity measures. || IMF's Lipsky commeted that the economic recovery needs to be ensured before exit strategies are implemented || Polish Central Banker Wasilewska-Trenkner commented that Polish Q3 GDP would 'not be worse' then Q2's pace of 1.1%. The banker reiterated that 2009 GDP was seen around 1% and Polish inflation at 2.5% by mid-2010 ||Turkey Central Bank sees volatility in inflation until H2 of 2010 due to base effect despite downward pressures || EBRD comented that Eastern European would see 'drawn out' recovery. The organization would revise its forecast for region with lower 2009 growth but higher 2010 GDP view


- In Currencies: Trade flows were scare as market participants remained on the sidelines ahead of the U.S. Non-Farm Payroll data. The Euro did drift higher during the session aided by some potential M&A. Reportedly Chinese sovereign wealth fund CIC and Japan's Toshiba were studying possible investment in the France's Areva s T&D unit. Chatter that Potash might bid for Germany's K+S AG. | The weekly close in gold could hold the key to the USD price action. IMF continues to see the USD as the unrivaled safe haven asset

- In Fixed Income: Government Bonds were subject to moderate gyrations this morning as typically verbose commentary emanated from the ECB Watchers conference in Frankfurt. The ECB's Trichet ultimately continued to walk the fine line between outlining credible exit strategies and ensuring the market is firmly aware that said exit strategies are some distance away from being needed. With equities getting a lift, Bunds are yielding 3.265% in the cash market, about 2bps higher on the session. There seems to be a consensus in the market that today's pivotal non farm payrolls report, which is likely to dictate September ranges, will offer limited upside for sovereign debt. In an indication of just how far this rally for Treasuries has come, there are roughly 50bps between current yields in the 10y note and the August highs of 3.85% , following last months report. And 3.25%, probably the next key resistance for the US benchmark, was a level last touched in late May when the S&P 500 was below 900. In corporates, order books on a 15y benchmark offering from EDF are said to be in excess of €12B, with price talk of a yield of less than 100bps above midswaps

- In Energy: Mexico Energy Min commented that its country was mulling changes to its oil laws to emulate Brazil's state-controlled Petrobras || Petrobras [PBR] pushed back plan for oil exploration in the subsalt layer of the Jequitinhonha basin

- In commodities: Gold steady, still flirts with $1,000 level. The traders are watching the daily/weekly close this session for additional technical momentum. Gold bugs seeing potentially $300/oz move higher if all goes to plan.

- In the papers: ECB's Trichet writes in today's FT about the central bank's that ECB has exit strategy in place and the exit might require short-term interest rate moves . The article noted that several ECB special credit measures set to unwind naturally. ECB interest rate corridor allows short-term interest rates changes if continued credit support still needed.


NOTES

- Metal heads watching the weekly close in Gold with $980-990 level seen as key

- Lots of ECB talk in the session and echoing the recent ECB press conference. Unclear of the timing of exit strategy

- China will use CNY currency and not USD to purchase $50B worth of IMF bonds.

- China's Currency regulator SAFE announced new rules for foreign direct investment

- Fed's Fisher: "Praying" US jobless rate does not hit 10%

- IMF Strauss-Kahn: Risk that stimulus withdrawal occurs too soon and jeopardize economic recovery

- Focus on U.S. and Canadian payrolls ahead of US holiday


Looking Ahead

- all about the jobs

- 7:00 (CA) Canadian Aug Unemployment Rate: 8.8%e v 8.6% prior, Net change: -15.0Ke v -44.5K prior

- 8:30 (US) Aug Change in Non Farm Payrolls: -230Ke v -247K prior, Unemployment Rate: 9.5%e v 9.4% prior

- 8:30 (US) Change in Manufacturing Payrolls: -60Ke v -52K prior

- 8:30 (US) Average Hourly Earnings M/M: 0.1%e v 0.2% prior, Y/Y: 2.2%e v 2.5% prior; Average Weekly hours: 33.1e v 33.1 prior

- 9:30 (BR) Brazil Aug vehicle production: No estimates versus 281.6K prior

- 10:00 (CA) Canadian Aug Ivey Purchasing Managers Index: 54.5e v 51.8 prior

G-20 Finance ministers meet in London

- 15:30 (MX) Mexico Aug Consumer Confidence: 87.0 expected versus 85.4 prior