EU Market Update: Spanish bond auction yields rose less than feared; Attention turns to BOE rate decision


Economic Data

- (RU) Russia Gold & Forex Reserve w/e June 1st: 509.2B v $513.2B prior

- (FR) France Q1 ILO Unemployment Rate: 10.% v 9.9%e; Mainland Unemployment Rate: 9.6% v 9.5%e; Mainland Unemployment Change: +86K v +46K prior

- (CH) Swiss May Unemployment Rate: 3.0% v 3.0%e; Unemployment Rate Seasonally Adj: 3.2% v 3.1%e

- (FI) Finland Apr Preliminary Trade Balance: -€80M v -€151M prior

- (ZA) South Africa May Net Reserves: $47.7B v $48.3Be; Gross Reserves: $48.9B v $48.8Be

- (AU) Australia May Foreign Reserves: A$53.2B v A$47.6B prior

- (UK) May Halifax House Prices M/M: 0.5% v 0.5%e; 3M/3M: -0.1% v -0.1%e

- (CZ) Czech Q1 Avg Real Wage Y/Y: -0.1% v 0.0% prior

- (DK) Denmark Apr Industrial Production M/M: 0.0% v -2.0% prior; Industrial Orders M/M: -5.9% v 1.2% prior

- (HU) Hungary Apr Preliminary Industrial Production M/M: -2.4% v 0.6% prior; Y/Y: -3.1% v +0.5%e

- (CH) Swiss May Foreign Currency Reserves (CHF): 303.8B v 235.6B prior

- (EU) ECB: €1.3B borrowed in overnight loan facility vs. €621M prior; €784.6B parked in deposit facility vs. €787.3B prior

- (CH) Swiss May CPI M/M: 0.0% v 0.0%e; Y/Y: -1.0% v -1.0%e

- (CH) Swiss May CPI EU Harmonized M/M-0.2% v 0.0% prior; Y/Y: -1.1% v -1.1% prior

- (NL) Netherlands May CPI M/M: -0.1% v +0.4% prior; Y/Y: 2.1% v 2.4%e

- (NL) Netherlands May CPI EU Harmonized M/M: -0.2% v +0.5% prior; Y/Y: 2.5% v 2.6%e

- (CZ) Czech Q1 Current Account: +€1.4B v -€688.2M prior

- (CZ) Czech May International Reserves: $39.4B v $43.4B prior

- (NO) Norway Apr Industrial Production M/M: +2.4% v -0.7% prior; Y/Y: 7.5% v 2.4% prior

- (NO) Norway Apr Manufacturing Production M/M: 1.1% v 0.3%e; Y/Y: +1.9% v -0.8% prior

- (TW) Taiwan May Total Trade Balance: $2.3B v $1.0Be; Total Exports Y/Y: -6.3% v -5.2%e; Total Imports Y/Y: -10.5% v -4.8%e prior

- UN Food & Agricultural Organization (FAO) reports May Food Price Index M/M: 204 v 213 prior

- (UK) May PMI Services: 53.3 v 52.4e

- (HK) Hong Kong May Foreign Currency Reserves: $291.9B v $295.6B prior

- (GR) Greece Mar Unemployment Rate: 21.9% v 21.7% prior

- (SG) Singapore May Foreign Reserves: $237.7B v $246.1B prior

- (ZA) South Africa May SACCI Business Confidence: 92.8 v 94.3 prior

- (ZA) South Africa Apr Gold Production Y/Y: -12.8% v -11.6% prior; Mining Production Y/Y: -10.6% v -10.0%e

Fixed Income:

- (ES) Spain Debt Agency (Tesoro) sold total €2.07B vs. €1.0-2.0B indicated range in 2014, 2016 and 2022 Oblig Bonds

- Sold €638M in 3.30% Oct 2014 Bono; Avg yield: 4.335% v 3.463% prior; Bid-to-cover: 4.26x v 3.3x prior; Max Yield 4.483% v 3.52% prior

- Sold €825M in 4.25% Oct 2016 Bono; Avg Yield 5.353% v 4.319% prior; Bid-to-cover: 2.56x v 2.46x prior; Max Yield 5.443% v 4.368% prior

- Sold €611M in 5.85% Jan 2022 Bono; Avg yield: 6.044% v 5.743% prior; Bid-to-cover: 3.29x v 2.4x prior; Max Yield 6.121% v 5.778% prior

- (FR) France Debt Agency (AFT) sold total €7.84B vs. €7.0-8.0B indicated range in 2019, 2022, 2026 and 2060 bonds

- Sold €1.71 in 4.25% Apr 2019 Oat; Avg Yield 1.92% v 3.67% prior; Bid-to-cover: 2.39x v 1.6x prior

- Sold €3.48B in 3.0% Apr 2022 OAT; avg yield 2.46% v 2.96% prior; Bid-to-cover: 2.02x v 1.98x prior

- Sold €1.96B in 3.5% Apr 2026 OAT; avg yield 2.9% v 3.46% prior; Bid-to-cover: 1.94x v 2.37x prior

- Sold €685M in Apr 2060 Oats; avg yield 3.27% v 3.34% prior; Bid-to-cover: 2.33x v 1.41x prior

- (SE) Sweden sold SEK10B v SEK10.0B indicated in 3-month Biils; Yield 1.1245%

- (HU) Hungary Debt Agency (AKK) sold HUF45B in 12-Month Bills; Avg Yield 7.58% v 7.58% prior; Bid-to-cover: 1.78x v 1.81x prior

- (HU) Hungary Debt Agency (AKK) sold total HUF7.5B in Dec 2015 Floating Rate Note; Avg Price 95.10 v 95.09 prior, bid-to-cover: 2.51x v 2.57x prior


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Notes/Observations

- Fed Vice Chair Yellen maintains her dovish feathers and argues for more easing; Chairman Bernake to testify later today on the economic outlook

- Australia May employment change beats expectations with +46K reading vs. -5K expected

- China delayed changes to bank capital rules

- Beige book saw US expansion as moderate

- German government warming to idea of redemption fund

- Swiss FX reserves rise in defense of the 1.20 floor in EUR/CHF cross

- Spain 3-tranche bond auction well received (overall issuance was small and Spanish yields rose less than feared


Equities

FTSE 100 +0.70% at 5422, DAX +0.60% at 6129, CAC-40 +0.70% at 3079, IBEX-35 +1.5% at 6512, FTSE MIB +0.80% at 13,541, SMI +0.20% at 5835, S&P 500 Futures +0.30% at 1320

- European equity markets have continued to move higher on hopes of further stimulus from global central banks. Markets opened the session broadly higher, as the Spanish IBEX-35 index has once again outperformed on the session, amid the move lower in peripheral bond yields. European banks have gained 1-4%, so far on the session. However, Italian banks have lagged, as data from May showed that these firms have continued to increase their reliance on the ECB (ECB funding to Italian banks at €272.7B v 270.9B prior) Looking ahead, traders are expected to focus on the later today BoE policy decision and comments out of Fed Chairman Bernanke, as some in the market question whether additional easing measures have already been priced in.

- UK listed companies trading higher include Aer Lingus [AERL.UK] (+4.5% after releasing May traffic figures), Tullow Oil [TLW.UK] (up ~2% as it disclosed oil find) and Johnson Matthey [JMAT.UK] (+2.5% after reporting FY11 results and disclosing a special dividend. In France, Club Med [CU.FR] is lower 3%, after reporting its H1 results.

Speakers:

- (US) Fed's Rosengren (Dovish) spoke at the IIF conference and reiterated that risks to global economic and financial outlook were again on the rise. Tail risk concerns were seeping into economic forecasts. And added that concerns about future problems hurting growth. Also, the financial system was still quite vulnerable to funding tensions. Low US and German bond yields showed inflation was not prime concern. Lastly short term funding markets were better stress indicator than geographic markets.

- UK Chancellor Osborne commented that Euro Zone countries needed to recapitalize the Spanish banking sector. Greater harmonization was needed for fiscal and banking policies

- SNB says increase in Fx reserves from Apr to May mainly due to currency purchases made to defend EUR/CHF floor at the 1.2000 level

- Norway Fin Min Johnsen commented that the EU crisis was having severe impact on its job market but expressed confidence the Euro crisis would be resolved, but will take a long time. EU debt crisis might have impact on Norway exports and bank funding

- Bank of Italy released its May Balance-Sheet Aggregates with ECB funding to Italian banks at €272.7B v 270.9B prior

- China Sovereign Wealth Fund (CIC) chief Lou commented that it sold its exposure to European Periphery a time long ago and did note a rising risk Euro zone breakup. The fund was underweighting in developed countries and overweighting emerging markets

- Former MoF Official Sakakibara ("Mr Yen") commented that he did not see need for JPY currency intervention at this time as the JPY was not too high at current levels . He saw USD/JPY in range between 75 to 80 for the next few months but move below the 75 handle if the European crisis worsens. He believed any JPY FX intervention would not be effective without external help. He also noted there was no reason to be negative about Japan's economy. BOJ has additional room to ease

- South Korea Vice Fin Min Kim Dong-yeon commented that there were no plans for a second budget at this time but would not hesitate to use expansionary fiscal policy if impacted by the European debt crisis

- IMF forecasted Spanish banking sector needs €40-80B in new capital under two scenarios. The IMF would publish two estimates, one that takes into account the current economic situation in Spain and another scenario which stressed capital needs could rise to €80B

- Russia Economy Min Belousov: Russia planned to triple its privatization (state asset sales) volume in 2012 to RUB300B

- Russia PM Medvedev stated that Russia should be a full member of the WTO by early August

- China Fin Min commented that property market controls are at a pivotal point and need to prevent rebound in domestic prices. Domestic prices still seen at high levels

- Algeria Energy Min commented that OPEC would assess measures to maintain oil market balance at its upcoming meeting

- UN Food & Agricultural Organization (FAO) commented that it expected global food prices to decline further in the coming months, but without big drops.

Currencies:

- Risk appetite continue to find its footing again today aided by additional QE expectations and an improving Far East economic picture and this provided some softness in the overall USD and JPY currencies. Financial press also picking up on the theme that the German government was warming to idea of redemption fund

- More dovish leaning Fed speak backed recent press speculation of more possible QE measures to be discussed at the upcoming Fed meeting next week. European dealers took note of Yellen's comments made during the Asian session noting that she tended to work with Chairman Bernanke and NY Fed's Dudley as a group. The Fed Chairman will testify later today on the economic outlook.

- The EUR/USD made an attempt to retest the 1.26 neighborhood but fell shy of the objective. Dealers noted of stops building above the key 1.2630 area and a daily close above that level could send the pair sharply higher with 1.29 mentioned as a possibility.

- Dealers believe that the BoE would remain on hold for both rates and QE despite some recent data softness. The UK PMI Services data came in a bit stronger in today's session and likely solidified the steady BOE decision. The GBP/USD tested above the 1.55 handle during the session to recoup its earlier losses during the Asian session lows of 1.5430

Political/ In the Papers:

In news related to Spanish banks, an article in the London Telegraph said that EU officials are believed to be working on a contingency strategy to support Spanish banks, which could see Spain provided with €80B. In recent days, Spanish banking executives have estimated the capital need for the banking sector at ~€40B. A separate financial press report said that the IMF estimated that the Spanish banking sector needs €40-80B in new capital. Although EU officials have said that the ESM's current treaty prohibits the direct recapitalization of banks, on yesterday's session a German government spokesman said that the bailout facility was available for Spain should it ask for aid. Germany added that the application to use the bailout fund must come from a government.
German Chancellor Merkel was quoted as stating that it may take more than one summit to reach the EU's objectives (as she commonly plays down expectations related to the EU summits). The EU Leader Summit is scheduled for June 28-29th.
fIn France, a poll of local businessmen showed that about 66% believe that uncertainty related to the Euro Zone is driving the deterioration in the domestic economy.
UK senior Tory MP leader Andrew Tyrie has called for Greece to quit the Euro. Tyrie is the former chief economist for the European Bank for Reconstruction and Development.
The London Telegraph reported that the Bank of Cyprus is planning to open a UK-based unit in order to ensure that certain deposits are protected by the UK's financial services compensation scheme.
A study by CICC revealed that in 2011, China's direct investment into Europe tripled to approx. $10B (Financial Times)
Amid the concerns that efforts by banks to reduce their balance sheet could lead to a credit crunch in Europe, a US financial press report noted now deleveraging by banks had made financing conditions more tight for certain European cities.
In news reported to the US property market, data from Citi Habitats showed that in May Manhattan apartment rents rose to a record high, supported by the New York City labor market.


Looking Ahead

- (EU) ECB chief Draghi at Bocconi University

- (US) JP Morgan CEO Jamie Dimon testifies in the Senate

- (RU) Russia May Official Reserve Assets: No est v $524.4B prior

- 6:00 (IE) Ireland May CPI M/M: No est v 0.0% prior; Y/Y: No est v 1.9% prior

- 6:00 (IE) Ireland May CPI EU Harmonized M/M: No est v 0.0% prior; Y/Y: No est v 1.9% prior

- 6:00 (ZA) South Africa Q2 BER Business Confidence: No est v 52.0 prior

- (IS) Israel May Foreign Currency Balance: No est v $76.6B prior

- 6: 30 (US) daily LIBOR fixing

- 7:00 (UK) Bank of England (BOE) Interest Rate Decision: Expected to leaves both Interest Rates and Asset Purchase Target unchanged at 0.50% and £325B respectively

- 7:00 (ZA) South Africa Apr Manufacturing Production M/M: -0.3%e v -4.3% prior; Y/Y: +0.9%e v -2.7% prior

- 7:30 ((DE) German Chancellor Merkel with UK PM Cameron

- 8:30 (US) Initial Jobless Claims: 378Ke v 383K prior; Continuing Claims: 3.245Me v 3.242M prior

- 8:30 (CL) Chile May Trade Balance: $0.1Be v $1.1B prior; Total Exports: No est v $6.9B prior; Total Imports: No est v $5.9B prior

- 8:30 (CL) Chile May Copper Exports: No est v $3.6B prior

- 9:00 (MX) Mexico May Consumer Prices M/M: -0.4%e v -0.3% prior; Y/Y: 3.8%e v 3.4% prior; CPI Core Y/Y: 0.3%e v 0.2% prior

- 10:00 (US) Fed Chairman Bernanke testifies on economic outlook

- 10:00 (HU) Hungary May YTD Budget Balance (HUF): No est v -228.2B prior

- 10:00 (CA) Canada May Ivey Purchasing Managers Index Seasonally Adj: 54.5e v 52.7 prior; PMI Unadj: No est v prior

- 10:30 (US) Weekly EIA Natural Gas Storage Inventories

- 10:30 (ES) Spain PM Rajoy with Netherlands PM Rutte

- 11:00 (EU) EU President Van Rompuy speaks at Friends of Europe

- 11:00 (US) Fed to buy $8.00-8.75B in notes

- 12:00 (ES) Spain Econ Min De Guindos to announce BOS Gov decision

- 12:10 (US) Fed's Lockhart speaks on U.S. Economy in Georgia

- 13:15 (US) Fed's Kocherlakota speaks in Minneapolis

- 15:30 (US) Fed's Fisher speaks on China currency Renminbi at La Jolla, Ca

- 15:00 (US) Apr Consumer Credit: $11.0Be v $21.4B prior

- 19:50 (JP) Japan Q1 Final Nominal GDP Q/Q: 1.1%e v 1.0% prelim; Annualized GDP: 4.5%e v 4.1% prelim

- 19:50 (JP) Japan Apr Current Account: ¥440.8B v ¥1.589T prior; Adjusted Current Account: ¥615.6Be v ¥785.5B prior

- 19:50 (JP) Japan Apr Trade Balance: -¥450.7Be v ¥4.2B prior

- 21:30 (AU) Austral Apr Trade Balance: -A$900M v -A$1.6B prior