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Forex Blog - European Market Update: German economic sentiment rises for the seventh straight month; Risk appetite theme remains intact

Today 05:51am EST/09:51am GMT

European Market Update: German economic sentiment rises for the seventh straight month; Risk appetite theme remains intact


- (SP) Spain Mar Trade Balance: € v -€5.87B prior

- (JP) Japan April Machine Tool Orders Y/Y: -80.4% v -80.4% prior

- (HU) Hungarian Avg Gross Wages Y/Y:4.3 % v 3.8%e

- (SP) Spain Mar Industrial Orders Y/Y: -20.6% v -31.3% prior

- (SW) Sweden Q1 Total number of Employees Y/Y: -0.8% v 0.3% prior

- (IT) Italian Mar Trade Balance: €82.0M v €336.0Me; Trade Balance EU: -€85.0M v -€105.0M prior

- (NO) Norwegian GDP Q/Q: -0.4% v -1.0%e, GDP Mainland Norway Q/Q: -1.0% v -1.0%e

- (HK) Hong Kong Apr Unemployment Rate: 5.3% v 5.4%e

- (UK) April CPI M/M: 0.2% v 0.4%e; Y/Y: 2.3% v 2.4%e; Core CPI Y/Y: 1.5% v 1.6%e

- (UK) Apr RPI M/M: 0.1% v 0.2%e; Y/Y: -1.2% v -1.1%e; Retail Price Index: 211.5 v 211.6e, RPI Ex mortgages: 1.7% v 1.7%e

- (GE) May ZEW Survey Econ Sentiment: 31.1 v 20.0e; Current Situation: -92.8 v -90.0e; Seventh straight increase for the Economic sentiment while the eleventh consecutive decline for the current situation component

- (EU) May ZEW Econ Sentiment: 28.5 v 18.0e

- (EU) Mar Construction Output M/M: -1.0% v -0.6% prior, Y/Y: -8.7% v -8.6% prior


- In equities: European equity markets snapped their trend of lower openings with a strong pre-market and opening level. Bullish, risk appetite rolling over from NY and into the Asian session transferred into the European morning. This sentiment ignored moderate earnings reports out of large cap UK firms including Vodafone [VOD.UK], ICAP [IAP.UK] and SSL International [SSL.UK]. Disappointing FY numbers, and an expected dividend cut out of Marks and Spencer [MKS.UK] moved those shares, and the UK based retail sector lower in early trades. This, however, was the only negative equity movement. All other sectors significantly outperformed, UK banks [RBS.UK], [LLOY.UK] were buoyed by comments that the Treasury may be shopping stakes to sovereign wealth and private investment funds out of the FT. Steel and heavy manufacturing moved higher, aided by an analyst action on ArcelorMittal [MT.NV]. Continued bids in energy markets strengthened the European energy complex with Total [FP.FR] ENI [ENI.IT] and Royal Dutch [RDSA.UK] (ahead of what is expected to be a cantankerous AGM) all trading higher. Markets broadly trended higher through the European morning and into the 4:00EST hour. Outside of some regional retail underperformers, all equity sectors and names traded up on broad risk appetite. 4:30EST data for UK April CPI and RPI came in below market expectations, but in positive territory, furthering the equity rally. Markets pulled back ahead of the 5:00EST German ZEW survey for May, but the 7th consecutive positive result, at 31.1, well ahead of the 20.0e pushed European bourses to their best levels. As the 5:00EST hour developed, equities trended off their best levels remaining broadly positive. By 5:15ESt, the DAX continued to outperform, up +1.60% while the CAC and FTSE remained under the +1.00% hurdle.

- In individual equities -(UK) UK has started talks with sovereign wealth funds and other investors about selling stakes in some UK banks - FT. UK Financial Investments Ltd, which was created to oversee the government's stakes in various banks, has had "substantial" contact with possible investors, including UK institutions and oversees organizations such as sovereign wealth funds. The UK government has a 43.5% stake in Lloyds and a 70% stake in RBS. || Marks and Spencer [MKS.UK] Reports FY08 Net £508M v £713Me, Rev £9.1B v £8.9Be, cutting dividend, Reports UK LFL sales -5.9% y/y: General Merchandise LFL sales -6.9% y/y; Food LFL sales -5.0% y/y, Sees 2009/10 Gross Margin down 125 - 175bps, Sees 2009/10 CAPEX at £400M v £652M y/y, Net debts £2.5B v £3.1B y/y. || Vodafone [VOD.UK] Reports FY09 Net £3.1B v £4.7Be, Rev £41.0B v £40.7Be. Guides FY10 Adj Op Profit £11.0-11.8B. Challenging environment; recent revenue trends assumed to continue. EBITDA margin expected to decline at a slightly slower rate || Burberry [BRBY.UK] Reports FY08 Adj pretax profit £175M v £165Me, Rev £1.20B v £1.2Be . Full year div maintained at 12p/shr. Net cash of £8M at year end (2008: net debt £64M). Comparable store sales increased by 1.1% in the year (H1: up 3.4%; H2: down 0.5%). Guides FY9/10 CAPEX at £60M (ex Japan). See cost savings of £15-20M from accelerated programs. || VW [VOW.GE]German Lower Saxony Spokesperson: Plan to maintain 20% stake in VW following a potential VW-Porsche tie up. No plans to raise stake. See the Porshe and Piech families as lacking unity in decisions. Merger would have large benefits, companies should seek foreign investors. || Gazprom [GAZP.RU] Update: Ordered by Russian gov't to slash its dividend amidst falling demand and shrinking exports - Times. Company would cut the payment to its investors by 86% to a mere 37 kopecks per share - ¾p in sterling terms. In a statement issued by Gazprom's board yesterday, the decision to make a drastic cut in dividend was made "pursuant to the Russian Government's directive". ||Bank of Ireland [BKIR.IR] Reports FY09 Net €59M v €222.7Me, pre tax loss €7.0M v profit €195Me, Op profit (pre impairment) €1.89B v €791Me. Will not pay final dividend (as expected). Tier 1 ratio 12.0% v 8.1% y/y. Market conditions will continue to be difficult for coming period. FY08 impairment charges at €1.44B v €227M y/y. Expects FY09-11 impairment charges at

- Speakers: ECB's Kranjec commented that the ECB was unified on next policy moves. He reiterated that the central bank would provide technical details of covered bond purchases at next month policy meeting. He also noted that there were promising sings of economic recovery taking hold

|| ECB's Tumpel Gugerell commented that she was unsure at this point in time if economic crisis was near an end, but situation had stabilized || Polish Central Filar commented that GDP growth was still possible for both Q1 and for 2009 as a whole. Cutting interest rates will not alter market rates. MPC should change its policy bias || German Deputy Econ Min commented that credit supply to face test this summer || ZEW economists commented that there are signs that recent optimism was supported by modest signs of recovery in real economy. However, the officials noted that the worst has still yet to come for the labor markets. It did note that exports and incoming orders were beginning to rise again and that the decline in industrial production has ended. ZEW economists noted that both" L" and "V" shaped recoveries would be in line with survey results. It saw no signs that inflation pressures are building within next 6 months nor did survey participants see deflationary pressure at this time || Russian Econ Min Nabiullina commented that the Russian economy could contract by up to 8% in 2009 and global growth seen off by 0.4% this year.

- In Currencies: The session was continued to be characterized by a renewed sense of risk appetite. Both the USD and JPY were softer among the major pairs as commodities continued to move higher. Growing speculation three American banks would repay a combined $45B of government funds fueled optimism that perhaps the worst of the financial crisis was over. German ZEW data also provided some additional optimism as the economic sentiment rose for the seventh straight month. EUR/USD tested 1.3655 following the better-than-expected German data. The GBP was leading the charge in the session as the GBP/USD pair probed its best level since mid-December at it hovered just under the 1.55 handle and EUR/GBP regain a footing below the 0.8800 for the bulk of the morning. The JPY was mildly weaker with the EUR/JPY cross rose over 130 pips during the morning to test 131.85 before consolidating its gains. GBP/JPY approached the 150 area before retreating ahead of the NY morning.

- With both energy and metals in positive territory, the AUD and CAD currencies were firmer. NYMEX July crude held above the $60 handle throughout the European morning for its best level since early Nov 2008. Spot Gold and silver held onto gains while copper recovered from its Asian session losses. Dealers noting that Oman purchased sterling and euros for its reserves

-In Fixed Income: Government Bonds have been offered this morning as investors jump on the risk bandwagon, with longer dated issues bearing the brunt of the selling. The German yield curve reached its steepest level in over a decade, with 2s10s reaching 216bpbs in early trade. Gilts received a brief lift from a weaker than expected inflation data, before largely surrendering their gains as the morning wore on , whilst the benchmark 10y T- Note has moved back above 3.25% for the first time in over a week. Further indications of reduced money market tensions were evident in the swaps complex where 2y USD swap spreads have reached their narrowest level in over two years, below 35bps. Ireland managed to comfortably auction €1B in 2014 and 2019 Bonds, assuaging concerns over the country's ability to fund its massive deficit and putting rest to broader questions sustainability of the EMU, at least for the time being.

- Credit Crisis: Financial Times discussed that the hedging costs for companies might rise due to proposed regulation. The article noted that companies using trillions of dollars of derivatives contracts to hedge interest rate, currency and commodity price risks could face higher costs under the proposed overhaul of US rules on derivatives.

*** NOTES ***

- The risk appetite continues to gain as market participants continue to believe that the worst of the global economic crisis was over. Growing speculation three American banks would repay a combined $45B of government funds fueled additional optimism

- German May ZEW economic sentiment survey rises for the seventh straight month but current situation falls for the eleventh straight month. The debate between "V" shape or "L" shape recovery will continue for some time

- South Koreas business start up/failure ratio at 9-month highs.

- Oman diversifies out of USD somewhat as it buys GBP and EUR

- Treasury to name first group of re-payers next few weeks. GS AXP JPM almost certain. MS wants to be.

- IMF: Consumer demand in advanced economies may not recover as much as in past.

- Looking Ahead:

- 8:00 (PD) Polish Apr Employment M/M: -0.4% expected versu -0.5% prior; Y/Y: -1.5% expected versus -0.9% prior

- 8:00 (PD) Apr Avg gross wage M/M: -1.5% expected versus 4.3% prior; Y/Y: 4.5% expected versus 5.7% prior

- 8:30 (US) Apr Housing Starts: 520k expected v 510k prior

- 8:30 (US) Building Permits: 530k expected v 516k prior

- 9:00 (BE) Belgium May Consumer Confidence: No estimate versus -22.0 prior


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