European market Update: German ZEW fails to meet expectations; BOE's King considering cut in deposit rates to reduce reserves


ECONOMIC DATA

- (FI) Finland Aug Retail Sales Y/Y: -0.4% v 0.2% prior

- (JP) Japan Aug Final Machine Tool Orders Y/Y: -71.5% v -71.3% prior

- (FR) French Aug CPI M/M: 0.5% v 0.3%e; Y/Y: -0.2% v -0.4%e

- (FR) French Aug CPI - EU Harmonized M/M: 0.6% v 0.3%e; Y/Y: -0.2% v -0.4%e

- (FR) French Aug CPI - Ex Tobacco Index: 118.41 v 118.24e

- (FR) French Jul Current Account: -€1.2B v -€3.3B prior

- (HU) Hungarian Jul Final Industrial Output M/M: -0.7% v -0.7% prior, Y/Y: -19.4% v -19.4% prior

- (CZ) Czech PPI (Industrial) M/M: 0.2% v 0.0%e; Y/Y: -5.1% v -5.3%e

- (CZ) Czech Jul Export Price Index Y/Y: 0.5% v 1.5% prior; Import Price Index Y/Y: -4.4% v -3.3% prior

- (TU) Turkish Jun Unemployment Rate: 13.0% v 12.9%e

- (SP) Spain July House Transactions Y/Y: -20.3% v -25.5% prior

- (FI) Finland July Current Account: €0.4B v €0.3Be

- (SZ) Swiss Q2 Industrial Production Q/Q: 2.7% v 7.3%e; Y/Y: -14.9% v -11.1%e

- (DE) Denmark Aug Wholesale Prices M/M: 0.6% v -0.6% prior, Y/Y: -8.3% v -10.5% prior

- (NV) Netherlands Jul Retail Sales Y/Y: -3.6% v -4.4% prior

- (IT) Italian Q2 Labor Costs Q/Q: 1.0% v 0.1% prior; Y/Y: 4.6% v 0.6% prior

- (NO) Norwegian Aug Trade Balance (NOK): 24.9B v 30.8B prior

- (UK) Aug CPI M/M: 0.4% v 0.3%e; Y/Y: 1.6% v 1.4%e; Core Y/Y: 1.8% v 1.6%e

- (UK) Aug RPI M/M: 0.5% v 0.2%e; Y/Y: -1.3% v -1.5%e; Ex mortgages Y/Y: 1.4% v 1.2%e

- (UK) DCLG UK House Prices Y/Y: -8.3% v -9.5%e

- (GE) German Sep ZEW Survey Econ Sentiment: 57.7 v 60.0e; Current Situation: -74.0 v -67.5e

- (EU) Euro-zone Sep ZEW Current Situation: 59.6 v 60.0e

Supply

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- In equities news overnight: European equity markets opened to the positive side following a broadly positive session in Asia. Equities trended lower almost immediately as the sharply advanced news flow (in relation to recent volumes) focused heavily on auto's, manufacturing and discretionary names. In the auto sector, truck maker Volvo [VOLVB.SW] released its August sales figures, reflecting a continued downward trend y/y and m/m declines. EU Aug new car registrations temporarily rallied personal auto makers but a constant flow of sales and unit expectations out of Citroen [UG.FR], Daimler [DAI.GE], BMW [BMW.GE] and Porsche [PAH3.GE] dampened this initial excitement. Equity markets continued to trend lower through mixed data along with further commentary out of China regarding international trade, tires and carbon taxes. Markets snapped sharply negative, and to their worst levels of the session at 5:00EST following German and EU ZEW survey's that did not meet their expectations. Mixed commentary out of the BoE's MPC added to the picture as both King and Bean refused to comment on the current trading levels of the FTSE100. Positive comments out of Citi on European steel names and positive comments out of BNP on German solar names allowed those sectors to outperform throughout the session. In this thoroughly mixed trading environment, markets continue to seek direction in (what is a not unexpectedly) a varying turnover environment.

-In individual equities: Volvo [VOLVB.SW] Reports August Truck Sales 7.1K v 8.9K m/m (- 52% y/y). ||

BMW [BMW.GE] Sees 2009 sales -10-15% y/y; Remains possible to post a full year profit in 2009. || Peugeot [UG.FR] Group sees Euro market declining by appx 15.5M units in FY09, 14M in 2010. Group is continuing to discuss JV opportunities with Chinese names. || Porshce [PAH3.GE] Reports FY unit sales -24% y/y to 75.2K, Rev -12% to approx €6.6B v €6.2Be; The nadir in auto markets has been reached. || VW [VOW.GE] CEO: Auto industry crisis has not yet concluded; evidence exists that near a bottom. Discloses August sales +9.5% y/y; notes that VOW.GE is performing much better than competitors. || BG [BG.UK] Announces new discovery in Santos Basin pre-salt BM-S-9 concession area, offshore Brazil. || Unicredit [UCG.IT] Group to make final decision regarding gov sponsored convertible bond offer by end of Sept -Il Sole. Article states that bank may seek to sell €4B in bonds through the offer. || Debenhams [DEB.UK] Provides trading update: Sees Pretax, EBITA in line with expectations; Total Sales increasing Y/Y. Difficult to predict consumer behavior. || Ashmore [ASHM.UK] Reports FY09 Rev £203.5M v £201Me, AUM $24.9B v $37.5B y/y; Announces secondary offering of 15.7M new shares. || Michelin [ML.FR] CEO: Lower material costs are helping earnings; Forecasts positive FY free cash-flow - La Tribune. || EDF [EDF.FR] Group may take stake in new GazProm South Stream gas pipeline project -Kommersant. || Dexia [DEXB.BE] Has three potential buyers for its life insurance unit valued as much as €120M - La Tribune. || BP [BP.UK] Exec: In short term refining margins will be under severe pressures. ||

- Speakers: (UK) BOE's King stated that he did not want currency reserves unnecessarily high and was looking at ways to reduce reserves, which could include a cut in its deposit rate ||China's MOF reiterated the view that the global economic recovery was not yet solid and it was too early to discuss exit strategies from stimulus. The MOF noted that US carbon tariff was also a form of protectionism. The official noted that China would continue to pursue an active fiscal policy and moderately loose monetary policies ||China's PBoC Assistant Gov commented that it was seeking a larger role for China in IMF governance at the upcoming G20 meeting in Pittsburgh. The PBoC official noted that IMF bond purchases would serve to diversify China's reserve assets. Seeking timetable for bigger role for developing economies at IMF || Chinese Vice Min stated that he hoped that G20 would continue to oppose protectionism and added that the summit should seek an early close to Doha round negotiations || German Labor Institute commented that 2009 Jobless was seen at 3.5M and 2010 Jobless at 4.1M. These numbers are a bit better from the Sept 1st view the German Labor Min forecasted then of an average 2009 jobless below 3.7M and 2010 unemployment between 4M to 5M || UK) BoE's King commented in his testimony to Parliament that there were signs that growth had resumed in Q3 but cautioned that the strength and sustainability remained uncertain. The BOE head noted that CPI risks were on the downside. Spare capacity suggested that risk CPI would mean CPI below the 2.0% target and that inflation to be volatile over the next six months. The BOE would look at the timing of ending fiscal measures but noted that the severity of recession would impact the public finances. The BOE is how to return to growth potential but he conceded that it would be long time before prior output levels are seen again. The BOE chief noted that a credible plan to reduce deficit was urgently needed. BOE's King addressed the topic of reserves and noted that the BOE did not want currency reserves unnecessarily high and was looking at ways to reduce reserves, which could include lowering deposit rate. Economic headwinds remained but recent data was encouraging || ZEW Economists noted that the positive expectations have stabilized but noted that the recovery was expected to take place at a slow pace. Prospects for next 6 months hampered by end of car wrecking scheme || ZEW's Franz noted that Additional stimulus is not appropriate || BoE's Bean noted that it takes time for Quantitative Easing measures (QE) to have effect and that some channels for QE might not be working || BoE's Miles stated that he voted for Quantitative Easing (QE) due to the large excess capacity in UK economy. The increase in corporate bond sales linked to quantitative easing measures || BoE's Barker stated that the rise in house prices might not continue

- In Currencies: The USD held a steady tone during the European morning as option barrier talk helped drive price action.
The EUR/USD seemed set to test the 1.4560 level where an option is set to expire later today. The softer German ZEW data also helped the dollar to maintain its poise for the time being.

- The GBP saw its earlier gains erode following comments from the BOE chief King. BOE's King stated that he did not want currency reserves unnecessarily high and was looking at ways to reduce reserves, which could include a cut in its deposit rate. The GBP/USD slumped from 1.6600 to probe 1.6500 following the comments. EUR/GBP moved to the middle of the 0.8850 level, its highest level since early June.

- The JPY was a touch weaker for most of the morning against the major pairs (But not against the GBP after BOE's deposit rate comment)

- In Fixed Income: Short dated yields in the UK fell sharply after BoE governor Mervyn King stated that he was still considering lowering deposit rates in order to reduce bank's excess reserves and hoarding of capital. The yield on the 2y gilt fell by over 6bps to hit session lows below 0.86%, about half a basis point away from the all time closing lows set earlier last month when similar comments were made in the same settling. In the only coupon supply of the session, Ireland comfortably sold €1B in 5 and 10y bonds. In corporates, Australian bank Westpac launched a Euro denominate d 7y benchmark, indicated at around 120bps over swaps , whilst Chritian dio announced a €350M 5y offering, with price talk at 125bps/swaps

- In Energy: Shell [RDSA.UK] executive stated that he saw gasoline outlook remaining weak but that the recovery in global economies would raise distillate demand post recession || China's NDRC ordered domestic energy companies to make sure that supplies are adequate during the early Oct 60th National Day celebrations | Petro China [ PTR] Caijing reported that the China Marine Bunker jv had billions of yuan in unrealized losses from its oil derivatives positions ||


NOTES

- German ZEW survey fails to meet expectations; its economists see recovery expected at a slow pace

- UK RICS House Price balance registers its first positive reading since July 2007

- Singapore retail sales come in below expectations.

- Dealers label the US-China trade spat on tires as ping pong. The US believes that not imposing duties would be abdication of responsibility. China just states that tire duties simply sends wrong message.

- WSJ: Protectionist measures to rise.

- Japan's outgoing min Yosano: Rising JPY will have big impact on exporter earnings. Could make Japan less competitive.

- Australia's RBA: If trends continue less expansionary policy will be adopted.

- US govt might sell its Citi stake over the next 6-8 months, starting as early as October


Looking Ahead

- (RU) Russian Aug Industrial Production Real M/M: % v 4.7% prior, Y/Y: % v -11.0%e

- (RU) Russian Aug Producer Prices M/M: % v 1.4%e; Y/Y: % v -11.7%e

- 8:00 (BR) Brazil Jul Retail Sales M/M: 0.8%e v 1.7% prior, Y/Y: 6.2%e v 5.6% prior

- 8:00 (PD) Polish Aug CPI M/M: -0.5%e v 0.1% prior, Y/Y:3.6%e v 3.6% prior

- 8:30 (US) Aug PPI M/M: 0.8%e v -0.9% prior , Y/Y: -5.3%e v -6.8% prior, Ex Food & Energy M/M: 0.1%e v -0.1% prior, Y/Y: 2.2%e v 2.6% prior

- 8:30 (US) Aug Adv Retail Sales: 1.9%e v -0.1% prior, Less Autos: 0.4%e v -0.6% prior, Ex auto & gas: 0.0%e v -0.4% prior

- 8:30 (US) Sep Empire Manufacturing: 15.00e v 12.08 prior

- 8:30 (CA) Canadian Q2 Labor Productivity: 0.8%e v 0.3% prior

- 8:30 (CA) Canadian Jul New Motor Vehicle Sales M/M: 5.0%e v -0.6% prior

- 9:15 (CA) BoC's Murray

- 10:00 (US) Fed's Bernanke

- 10:00 (US) Sep IBD/TIPP Economic Optimism: 51.0e v 50.3 prior

- 10:00 (US) Jul Business Inventories: -0.9%e v -1.1% prior

- 11:30 (MX) Mexico Bond auction results