European Market Update: USD maintains soft sentiment following Treasury's David Dollar view that it made sense for China to diversify its reserves; China's Planning Ministry Deputy Zhang Xiaoqiang: Chinese loans were not reaching the companies that need them


ECONOMIC DATA

- (GE) German Wholesale Price Index M/M: 0.7% v -0.5% prior, Y/Y: -8.3% v -10.6% prior

- (HU) Hungarian Consumer Prices M/M: -0.3% v 0.3%e; Y/Y: 5.0% v 5.8%e

- (CZ) Czech Jul Final Industrial Output: -18.2% v -18.4% prior; Construction Output Y/Y: -4.4% v 0.7% prior

- (SP) Spain Aug CPI M/M: 0.3% v 0.4%e; Y/Y: -0.8% v -0.8%e; Core M/M: 0.1% v 0.2%e; Y/Y: 0.4% v 0.5%e

- (SP) Spain Aug EU Harmonized M/M: 0.4% v 0.4%e; Y/Y: -0.8% v -0.8%e

- (SW) Swedish Q2 Q/Q: 0.2% v 0.0%e; Y/Y: -6.0% v -6.2%e

- (SW) Swedish AMV Unemployment Rate: % v 5.2%e

- (IT) Italian Jul Industrial Production M/M: 1.0% v 0.4%e; Y/Y: -18.2% v -21.0%e; NSA Y/Y: -17.5% v -19.4% prior

- (CZ) Czech Jul Current Account (CZK): -3.1b v -3.0Be

- (UK) Aug PPI Input M/M: 2.2% v 1.0%e; Y/Y: -7.5% v -8.4%e

- (UK) Aug PPI Output M/M: 0.2% v 0.3%e; Y/Y: -0.4% v -0.5%e

- (UK) Aug PPI Output Core M/M: 0.2% v 0.2%e; Y/Y: 0.7% v 0.8%e

- (EU) Eurozone Q2 Current Account: -€21.5B v -€31.1B y/y


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- In equities news overnight : European markets opened on a light note following a similar trading pattern out of Asia (ex Japan). End of the week trading has been mixed following an intense week that saw a significant return of M&A, the 'conclusion' to the OPEL/GM saga and a low key OPEC general meeting (ex Venezuela who sent a delegation instead to Moscow). Significant equity news included FY prelim earnings out of pub operating JD Wetherspoon [JDW.UK], a bid increase out of Vedanta Resources [VED.Uk] and some cautionary comments out of the CEO of Total [FP.FR] regarding 2009 earnings and the potential for a 2014/15 energy price spike. Outperforming sectors today included Financials, following some imitations by SocGen on Lloyds [LLOY.UK] and the continued upward trend of Commerzbank [CBK.GE].
Health care and Consumer service sectors also outperformed on the EuroStoxx50 with consumer goods the notable underperformer. Overall trading volumes have been light on the FTSE100 and DAX. The CAC has managed to outperform its average on high turnover in shares of Air France [AF.FR] and Alcatel-Lucent [ALU.FR] .

-In individual equities: Alcatel-Lucent [ALU.FR] Exercises over allotment option on OCEANE convertible bond offer, brings total of offer to €1B. Over allotment offer brought total up from €870M. || Total [FP.FR] CEO: Fearful of oil crisis in 2014, 2015, says oil may exceed $145/bbl; 2009 profit may be at half 2008 level (implies approx FY09 Net €7B v €14B y/y) - Le Parisien. Continues to expect demand for both oil and gas to continue to grow. ||Vedanata [VED.UK] Announces increased cash offer for Asarco to $2.565B from $2.135B prior. || Wetherspoon [JDW.UK] Reports FY Pretax £45M v £62Me, Rev £955M v £956Me; LFL sale +1.2% y/y. || Tesco [TSCO.UK] Will invest £100M along with Fortis in new insurance JV. || BAE [BA.UK] UK MoD considering plans to convert ageing BAe146 aircraft into stopgap transports -Times. Upgraded BAe146 units would serve until delayed A400M program came on long and fulfilled the medium lift need. || Prudential [PRU.UK] May rely on Asia as a source of capital - FT. The company may seek to raise equity in Asia after it saw strong demand for a $750M hybrid capital raising earlier in 2009. ||

- Speakers: ECB's Bini Smaghi: Comments on stimulus exit strategy and noted that monetary policy might not be linked to non-standard exit. Interest rates must be raised before inflation materializes and reaffirmed ECB commitment to price stability. On exit staregy he noted that ay delay of exit strategy could mean an earlier monetary policy exit. He provided both scenarios of the situation and difficulty of the task at hand. The pace of tightening would depend on strength od economic recovery . Too early an exit could undermine economic recovery; too late an exit might provide the seeds of financial instability. he noted that once exit strategy was implemented it CANNOT be easily amended. It would be hard to correct exit pace if the initial timing is wrong || China's Planning Ministry Deputy Zhang Xiaoqiang stated that Chinese loans were not reaching the companies that need them. China must adjust flow of bank loans as some loans flowed into property while others into stocks || Russian Central Banker Ulyukayev commented that the CBR still keeps one-third of its $400B reserves in US Treasuries and added that it would like to diversify and add 2 to 3 new currencies to reserves. However he added that Says that one problem was that a lot of currencies are not liquid enough. He saw the country's gold and foreign currency reserves holding steady at the current level of around $400B by year-end. Additionally. The CBR had no plans to change composition rates of current Ruble Basket || France Fin Min Lagarde reiterated that current economic recovery was seen as fragile || Reportedly BOJ 'source' noted that the central bank was 'alarmed' that market assumed that special measures would be extended . The source noted that some special measures could end on schedule || ECB's Paramo: Reiterates viewpoint that 2010 will see a gradual and modest recovery. Also noted that it was conceivable to raise rates after withdrawing liquidity || ECB's Bini Smaghi commented that interest rates must be raised before inflation materializes

- In Currencies: Dealers noted that the combination of ongoing global risk appetite and the relatively soft recovery of the U.S. economy should continue to leave the USD on a soft note and it opened up in Europe that way. The USD hot fresh 2009 lows against the Euro and Swiss pair and 7-month lows against the JPY. The EUR/USD tested 1.4627 while the USD/CHF pair approached a quarterly pivot point of 1.0450 level. The broad USD weakness was being attributed to comments from US Treasury official's view on China. Treasury's David Dollar (who is the Treasury's economic and financial emissary to China) commented that it made sense for China to diversify and noted that China should have variety of currencies in reserve.

- The USD came off its worst levels ahead of the European equity open following comments from China's Planning Ministry Deputy Zhang Xiaoqiang who stated that: Chinese loans were not reaching the companies that need them and that China must adjust flow of bank loans as some loans flowed into property while others into stocks. The comments came after China reported a better Aug loan data during the asian session.

- The Japanese Yen continued its firm tone. Dealer have noted that the heavy September corporate Japanese repatriations apparently continue to provide its source of strength. USD/JPY tested 90.70 before consolidating.

- Morgan Stanley analyst commented currencies and remained a USD bear. The analyst noted that uncertainties surrounding quantitative measures would weigh upon USD (and British Pound too). The analyst forecasted that the USD would strengthen in 2011 Fed commenced its tightening cycle. A rally in risky assets might overshoot and USD/CAD pair could test parity in late 2010. It believed that the Canadian currency will outperform its commodity peers of Aussy and Kiwi dollars.

- The Dollar is approaching the NY morning off its worst levels but softer against the major and commodity-related pairs.

- It would be interesting to see where the USD ends the week in terms of price action. Dealers are noting that the U.S. administration appears not to mind an orderly USD decline but ponder if such sentiments are welcomed in other G7 viewpoints. Germany's IFO stated back in mid-August that most German companies can handle Euro exchange rate at 1.40, but rates over 1.50 could be a "big problem". The SNB has made its intention known since march in EUR?CHF but will it morph into USD/CHF?

- In Energy/commodities: Norway Petroleum Office: July avg oil production at 2.07M bpd. Gas production at 7.4B cubic meters || Total [FP.FR] CEO: commented in a Le Parisien interview that he was fearful of an oil crisis in 2014 to 2015 period. Ceo noted that oil might exceed $145/bbl. The company's 2009's profit might be at half 2008 level (implies approx FY09 Net €7B v €14B y/y) ||

- In Fixed Income Supply: European government bonds are well bid in Europe this morning in a follow though from yesterday's impressive long bond auction, with Binds and Gilts outperforming Treasuries on a relative basis. Volumes are moderate with under 250k in Dec Bunds contracts traded at the time of writing. Nonetheless, yield curves are flatter with better buying in the long end, and Gilt 2s10s have pulled back considerably from yesterdays all time highs to sit around 272bps. The yield on the Bund is back below the 3.30% level with the 10y Gilt at 3.66%. Next week is shaping up as an eventful one for Government bond markets with around €20B in European supply to be offered, almost half of which is to come from France. In corporates, French nuclear producer Areva has launched a 2 part benchmark offering, with trader reports of strong bidding. Order books on the €1.25B 2016's are said to be above €10B, with the €1B 2014 issue attracting €8B in orders. Three month Euribor fixed at a nother new low of 0.77%

- In The Papers: UK's Telegraph article noted that the European Commission warned that UK public debt could hit 180% of GDP within a decade unless drastic action taken. Article noted that the projection would more than twice the level forecast by the HM Treasury, which expected the debt to peak at around 80% of GDP by 2013.


NOTES

- China data continues to provide 'euphoria' on the risk appetite front. China's loan growth, Industrial Production, Retail Sales and Investment growth all rise in Aug from July levels.

- China's Planning Ministry Deputy Zhang Xiaoqiang: Chinese loans were not reaching the companies that need them

- European Commission warns that UK public debt could hit 180% of GDP compared to the 80% UK Gov't estimate.

- ECB's Bini Smaghi reiterates view that recent price declines should remain temporary

- Perpetual commodity bull investor Jim Rogers stated that he was holding back from buying more commodities on recent price increase


Looking Ahead

- 8:00 (PD) Polish Jul Current Account: €293Me v €459M priorm, Trade Balance: -€57Me v -€26M prior

- 8:00 (BZ) Brazil Q2 GDP Q/Q: 1.7%e v -0.8% prior, Y/Y: No estimates v 3.1% prior

- 8:30 (CA) Canada Jul New Housing Price Index: -0.1%e v -0.2% prior

- 8:30 (US) Aug Import Price Index M/M: 1.0%e v -0.7% prior , Y/Y: -15.9%e v -19.3% prior

- 9:30 (US) Fed's Evans

- 10:00 (US) Jul Wholesale Inventories: -1.0%e v -1.7% prior

- 10:00 (US) Sep Preliminary U of Michigan Confidence: 67.5e v 65.7 prior

- 14:00 (US) Aug Monthly Budget: -$139.5B expected versus -$111.9B prior