The 4th month and French govt resigns over policy direction

EU Market Update: Wheels in Europe continue to wobble as German IFO falls for the 4th month and French govt resigns over policy direction

Notes/Observations

- Divergence central bank views out of Jackson Hole favors further bullish USD trend

- Fed chair Yellen language seen moving towards neutral

- ECB seen moving closer to QE after Draghi acknowledged the weakened inflation outlook; German 10-year bund at fresh record low (below 0.95%)

- BOJ Gov Kuroda conceded that it might have to pursue its aggressive monetary policy easing for longer period

- France President dissolved his govt following internal feud over growth and austerity position (**would be 2nd Cabinet reshuffle in 4 months)

- German IFO registers its fourth consecutive decline as growth trend suffers from Russian sanctions

Key Economic Data in session

- (SG) Singapore July CPI M/M: -0.3% v +0.2%e; Y/Y: 1.2% v 1.9%e

- (FI) Finland July PPI Y/Y: -0.5% v -0.6% prior

- (CZ) Czech Aug Business Confidence: 11.1 v 10.1 prior; Consumer Confidence Index: -4.3 v -2.3 prior; Composite: 8.0 v 7.6 prior

- (ES) Spain July PPI M/M: 0.1 v 0.9% prior; Y/Y: -0.5 v +0.5% prior

- (AT) Austria Jun Industrial Production M/M: +1.4 v -1.7% prior; Y/Y: +1.0% v -1.5% prior

- (CH) SNB Sight Deposits for week ended Aug 22nd (CHF): 314.0B v 313.3B prior

- (EU) ECB €4M borrowed in overnight loan facility vs. €4.0M prior; €25.6B parked in deposit facility vs. €23.5B prior - Daily Eurosystem Liquidity Conditions - 03:30 (NL) Netherlands Aug Producer Confidence Index: No est v 1.2 prior

- (DE) Germany Aug IFO Business Climate: 106.3 v 107.0e; Current Assessment: 111.1 v 112.0e; Expectations Survey: 101.7 v 102.0e

- (TW) Taiwan July Industrial Production Y/Y: 6.1% v 4.9%e; Commercial Sales Y/Y: 2.8% v 2.9%e

- (TW) Taiwan July M2 Money Supply Y/Y: 5.6% v 5.7% prior; M1 Money Supply Y/Y: 7.7% v 7.5% prior

- (HK) Hong Kong July Trade Balance (HKD): -42.1B v -40.4Be; Exports Y/Y: 6.8% v 5.3%e; Imports Y/Y: 7.5% v 5.7%e

Fixed Income:

- (NO) Norway sold NOK3.0B vs. NOK3.0B indicated in 10-month Bills: Yield: 1.38%

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

***Equities***

Indices [Stoxx50 +1%, FTSE 100 closed, DAX +1.1% at 9,438, CAC-40 +0.9% at 4,293, IBEX-35 +0.9% at 10,590, FTSE MIB +1% at 20,118, SMI +0.3% at 8,581, S&P 500 Futures +0.3% at 1,993]

- Market Focal Points/Key Themes: Equity markets open sharply higher as traders react to Friday's comments from the ECB's Draghi, Trading conditions are thin amid the London bank holiday, German IFO below ests and raises renewed concerns about Q3 GDP, S&P 500 Futures pare gains after hitting another record high near 1,998

By Sector

- Industrials [Imtech IM.NL +5% (hired adviser for debt negotiations)]

- Stoxx50 sectors [Technology +1.3%, Industrials +1.2%, Basic Materials +1.2%, Consumer Cyclical +1.1%, Consumer Non-Cyclical +1.1%, Financials +1.1%, Energy +0.9%, Utilities +0.7%, Telecom +0.7%]

Speakers

- France President Holland orders PM Valls to have the Cabinet resign after an open feud with his Cabinet over the country's stagnant economy. The resignation followed a disagreement over policy between PM Valls and Econ Min Montebourg. Hollande to present new govt on Tuesday, Aug 26th and the new French govt to be coherent with direction set by the President

- ECB's Coene (Belgium): Faltering German economy is NOT good news for Europe. Overall tone was best described as worrying over the sustainability of the economic recovery. Sept would give a good indication of the economic activity for the fall period and whether the recent weakening was temporary or longer lasting (latter would probably be correction in growth forecasts)

- Switzerland's gov't said to discuss partially adopting EU sanctions against Russia

- Finland Foreign Min Tuomioja saw no final 'breakthrough' from talks related to Ukraine in Minsk but stressed it was time to implement Ukraine peace plan

- Russia Foreign Min Lavrov: Planning on another humanitarian aid mission this week to Eastern Ukraine that will use the same route

- BoJ said to consider using more upbeat language in Sept economic assessment and reiterate that the domestic recovery remained on a recovery track.

Currencies/Fixed Income:

- The USD benefited from a divergent view emerging from the G3 central banks (US, ECB and BOJ) at the Jackson Hole symposium over the weekend.

- Draghi's Jackson Hole commentary was viewed as dovish and left the door open for unconventional instruments including QE. ECB currently appears to be in 'wait-and-see' mode ahead of the Sept launch of TLTRO program and its potential impact but that could change with upcomg ECB staff projectiuons. The EUR/USD gapped to an 11-month low during the Asian session at 1.3185 and consolidated its losses

- The USD/JPY hit a 7-month high near 104.50 after BOJ Gov Kuroda stated that it might have to pursue its aggressive monetary policy easing for "some time" to fully vanquish deflation

- The dovish ECB speak and political confusion in France helped to send European bond yields to record lows in both periphery and core countries. German 10-year bund at fresh record low (below 0.95%)

Political/In the Papers:

- (EU) ECB's Draghi: Market based inflation expectations fell strongly in August; EMU recovery is uniformly weak, fiscal and monetary policies should focus on spurring demand in Europe (from Aug 22nd at Jackson Hole

- (UK) BoE's Broadbent: It is possible that weak growth in pay in the UK could continue

- (JP) BOJ Gov Kuroda: BOJ may have to pursue its aggressive monetary policy easing for "some time" to fully vanquish deflation - Jackson Hole

- (JP) Japan Coast Guard reports 4 China ships entered into waters near disputed Senkaku Island

Looking Ahead

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

- 05:30 (DE) Germany to sell €2.0B in 12-month BuBills

- 06:00 (IL) Israel July Unemployment Rate: No est v 6.3% prior

- 06:00 (RO) Romania to sell bonds

- 06:45 (US) Daily Libor Fixing

- 07:00 (BR) Brazil Aug FGV Consumer Confidence: No est v 106.9 prior

- 07:30 (BR) Brazil Central Bank Weekly Economists Survey

- 07:30 (TR) Turkey Aug Real Sector Confidence: No est v 106.4 prior; Real Sector Confidence NSA: No est v 109.0 prior

- 07:30 (TR) Turkey Aug Capacity Utilization: No est v 74.9% prior

- 08:00 (ES) Spain Debt Agency (Tesoro) announces size of upcoming 3-Month and 9-Month Bill auction

- 08:15 (US) Baltic Dry Bulk Index

- 08:30 (US) July Chicago Fed National Activity Index: +0.20e v +0.12 prior

- 08:50 (FR) France Debt Agency (AFT) to sell combined €6.8-8.0B in 3-month, 6-month and 12-month Bills

- 09:00 (IL) Israel Central Bank Interest Rate Decision: Expected to leave the Base Rate unchanged at 0.50%

- 09:00 (BE) Belgium Aug Business Confidence: -8.0e v -7.5 prior

- 09:00 (MX) Mexico Jun Retail Sales Y/Y: 1.3%e v 1.6% prior

- 09:35 (EU) ECB calls for bids in 7-Day Main Refinancing Tender

- 09:45 (US) Aug Preliminary Markit Services PMI: 58.0e v 60.8 prior; Composite PMI: No est v 60.6 prior

- 10:00 (MX) Mexico Q2 Current Account Balance: -$4.0Be v -$4.5B prior

- 10:00 (US) July New Home Sales: 429Ke v 406K prior

- 10:30 (US) Aug Dallas Fed Manufacturing Activity: 12.8e v 12.7 prior

- 11:30 (US) Treasury to sell $53B in 3-Month and 6-Month Bills

- 16:00 (US) Crop Condition Report

- (BR) Brazil July Total Federal Debt (BRL): No est v 2.202T prior

- (PT) Portugal Year-to-Date Budget Report

- (PE) Peru Q2 GDP Y/Y: 1.8%e v 4.8% prior