German 10-year Bund yield to record low level

EU Market Update: Safe-haven plays and month-end extension help push German 10-year Bund yield to record low level

Notes/Observations

- Japan Jun Jobless Rate hits a 5-month high (first increase since Aug 2013) 3.7% v 3.5%e

- Japan Jun Retail Trade disappoints (M/M: +0.4% v +0.8%e)

- FOMC begins its 2-day meeting ahead of Key data this week; recent weak 2-year Treasury auction indicates that market sentiment has started to shift away from Fed dovishness

- German 10-year govt bond yield hits fresh record low below 1.12%

Key Economic Data in session

- (JP) Japan July Small Business Confidence: 48.7 v 47.3 prior

- (DE) Germany Jun Import Price Index M/M: 0.2% v 0.3%e; Y/Y: -1.2% v -1.2%e

- (ZA) South Africa Jun M3 Money Supply Y/Y: 7.2% v 7.3%e; Private Sector Credit Y/Y: 8.7% v 8.1%e

- (ES) Spain Jun Adjusted Retail Sales Y/Y: 0.2% v 0.5% prior; Retail Sales Y/Y: 0.0% v 0.8% prior

- (EU) ECB €15M borrowed in overnight loan facility vs. €365M prior; €21.3B parked in deposit facility vs. €21.3B prior - Daily Eurosystem Liquidity Conditions

- (UK) Jun Net Consumer Credit: £0.4B v £0.8Be; Net Lending: £2.1B v £1.9Be

- (UK) Jun Mortgage Approvals: 67.2K v 63.0Ke

- (UK) Jun M4 Money Supply M/M: +0.1% v -0.1% prior; Y/Y: -0.6% v -0.6%e; M4 Ex IOFCs 3M Annualized: 4.6% v 3.8%e

Fixed Income:

- (UK) UK opened its books on new 2058 syndicate Gilt; guidance seen at 2-3bps over 2062 I/L Gilts

- (IT) Italy Debt Agency (Tesoro) sold €7.0B vs. €7.0B indicated in 6-month Bills; Avg Yield: 0.236% (record low) v 0.309% prior; Bid-to-cover: 1.75x v 1.73x prior

- (ZA) South Africa sold total ZAR2.35B in 2030, 2032 and 2044 Bonds

- (EU) ECB allotted €133.3B in 7-Day Main Refinancing Tender at fixed 0.15% vs. €100Be

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

***Equities***

Indices [Stoxx50 +0.2%, FTSE 100 +0.2% at 6,798, DAX +0.1% at 9,610, CAC-40 +0.1% at 4,347, IBEX-35 +0.3% at 10,915, FTSE MIB +0.5% at 21,037, SMI -0.2% at 8,515, S&P 500 Futures -0.1% at 1,970]

- Market Focal Points/Key Themes: Equity markets open slightly higher following losses seen on Monday's session, Russian markets open higher then move lower ahead of EU meeting on sanctions, UBS and Deutsche Bank issue Q2 earnings, Michelin declines on weaker than expected results, BP profits above ests, European property merger (Corio and Klepierre)

By Sector

- Telecom [Orange ORA.FR +1% (Q2 results above ests)]

- Technology [Gameloft GFT.FR -20% (cautious broker commentary following sales update), Aixtron AIXA.DE +2% (reaffirmed outlook)]

- Financials [Banco Espirito Santo BES.PT -5% (capital raise speculation, reports earnings on Wed), UBS UBSN.CH -1% (Q2 adj pretax profit inline), Deutsche Bank -0.5% (mixed Q2 results)]

- Energy [BP.UK -1% (Q2 profits above ests, concerns related to Russia)]

- Industrials [Renault RNO.FR -2% (H1 sales below ests), Michelin ML.FR -1% (H1 profits below ests); GKN GKN.UK +5% (H1 profits above ests), Faurecia EO.FR +3% (raised outlook)]

- Consumer Discretionary [Next Plc NXT.UK +2% (raised outlook), Puma PUM.DE +1% (Q2 profits above ests)]

- Stoxx50 [Consumer Cyclical -1%, Technology -0.7%, Industrials -0.3%, Energy -0.3%, Basic Materials -0.2%, Consumer Non-Cyclical -0.1%, Utilities -0.1%; Financials +0.5%, Telecom +0.3%]

Speakers:

- BOE's Broadbent: Current account deficit not a separate growth threat

- Japan Ministry of Finance (MOF) Survey: Most domestic companies' see sales recovering from the April sales hike by the end of July

- China State Economist Zhang Liqun: Reiterates China faces downward pressure in H2

- Bank of Korea July Minutes: Vote was not unanimous to hold rates steady; member Chung called for rate cut noting that domestic demand might stay weak for protracted time

- Moody's upgrades Vietnam sovereign rating to B1 from B2; outlook stable

- Goldman Sachs analyst Moffit: Reiterates RBA might be forced to cut interest rates by end 2014

Currencies/Fixed Income:

- German 10-year Bund yield hit a record low below 1.12% in the session. Dealers noted that safe-haven flows and month-end extension s contributed to price action. Fresh jitters emerged over Portuguese entity Banco Espirito Santo. EU ministers meet to discuss the next phase of Russian sanctions

- EUR/USD remained in a tight range just above its 200-week moving average. The pair has made eight lower lows over the last 10 trading days. Overall the greenback maintained a slightly firmer tone against most G10 currencies

- Market looking for clues as to when the Fed might start normalizing interest rates. Dealers noted that a lasting rebound of FX volatility required higher front-end US yields

- USD/JPY: Japan economic data for June has been consistently disappointing; with soft retail trade and labor figures released today tracking worse than expected exports, CPI, and manufacturing. Jobless rate rose for the first time in nearly a year

- The NZD/USD pair was lower after Fonterra cut its 2014/15 milk payout forecast to NZ$6.00/kg v NZ$7.00/kg prior guided

Political/In the Papers:

- (RU) President Obama's NSA adviser Blinken: US will take action on new Russia sanctions this week

- (RU) According to US senior official, Russia violated arms treaty with prohibited ground-launched missile test - NYT; In 1987 treaty signed by US's Reagan and Soviet's Gorbachev, bans ground-launched ballistic or cruise missiles capable for 300-3.4K miles.

- (RU) France, Germany, Italy and the UK agree Russia should face higher costs and sectoral sanctions due to involvement in Ukraine issue

- (UK) IMF: UK monetary policy is fine for now, may need higher interest rates if there is higher inflation risks or if housing market risks are not dealt with; GBP real FX rates may be overvalued by around 5-10%

- (JP) BOJ Board member Ishida: Japan economy recovery is moderate; CPI would stay around 1.25% for a while, may reach target 2% in middle of projection period up to FY16

Looking Ahead

All times listed for economic events are denominated in Eastern Standard Time (Add 4 hours for GMT equivalent)

- (RU) EU Ambassadors meet to decide on more Russian sanctions (third stage)

- (US) Federal Reserve begins 2-day FOMC Meeting (Decision on Wed)

- (ES) Spain Jun YTD Budget Balance: No est v -€25.8B prior

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 3-month Bills

- 06:45 (US) Daily Libor Fixing

- 07:00 (ZA) South Africa Q2 Unemployment Rate: 25.4%e v 25.2% prior

- 07:45 (US) Weekly ICSC Chain Store Sales

- 08:15 (US) Baltic Dry Bulk Index

- 08:55 (US) Weekly Redbook Retail Sales

- 09:00 (US) May S&P/CaseShiller 20 City M/M: 0.30%e v 0.19% prior; Y/Y: 10.00%e v 10.82% prior; Home Price Index: 171.25e v 168.71 prior

- 09:00 (EU) Weekly ECB Forex Reserves:

- 09:30 (BR) Brazil Jun Total Outstanding Loans (BRL): No est v 2.804T prior; M/M: no est v 1.0% prior; Private Banks Lending: No est v 1.336T prior; Personal Loan Default Rate: No est v 6.7% prior

- 10:00 (US) July Consumer Confidence Index: 85.5e v 85.2 prior

- 10:00 (MX) Mexico weekly International Reserves

- 10:30 (CA) Canada to sell 3-month, 6-month and 12-month Bills

- 10:30 (UK) DMO announces size of upcoming I/L 0.125% 2019 Gilt auction

- 11:00 (US) Fed to purchase $0.30-0.45B in Notes

- 11:00 (UR) Ukraine to sell 3-Month and 6-Month Bills

- 11:00 (UR) Ukraine to sell 2-Year and 5-Year Bonds

- 11:15 (BR) Brazil to sell I/L 2019, 2023, 2030, 2040 and 2050 Bonds

- 11:30 (US) Treasury to sell 4-Week Bills

- 13:00 (US) Treasury to sell $35B in 5-Year Notes

- 16:30 (US) Weekly API Oil Inventories

- 19:50 (JP) Japan Jun Preliminary Industrial Production M/M: -1.2%e v +0.7% prior; Y/Y: 5.2%e v 1.0% prior