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Friday May 22, 2009 - 10:26:06 GMT
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Forex Blog - European Market Update: Sovereign rating concerns weigh upon USD, GBP currencies

Today 05:59am EST/09:59am GMT

European Market Update: Sovereign rating concerns weigh upon USD, GBP currencies


- (TT) Taiwan Apr Unemployment Rate 5.8% v 5.8%e

- (SZ) Swiss Apr Money Supply M3 Y/Y: 3.8% v 3.4% prior

- (IT) Italian Mar Retail Sales M/M: 0.1% v -0.2%e; Y/Y: -5.2% v -0.9%e; Lowest YoY reading since series began in 1997

- (UK) Q1 Prelim GDP Q/Q: -1.9% v -1.9%e; Y/Y: -4.1% v -4.1%e

- (UK) Index of Services 3M/3M: -1.2% v -1.2%e


- In equities: Following Thursday's declines, equity futures opened to the positive side on light/mixed corporate news. On the open, European bourses snapped a negative streak with the FTSE, DAX and CAC opening between +0.25% to 0.60%. Following disappointing FY08/09 earnings out of British Airways [BAY.UK], shares underperformed to the downside, other large cap carriers including Air France [AF.FR] and Lufthansa [LHA.GE] underperformed their respective indicators. Analyst upgrades from Goldman on miners/basic resource names sent those shares higher in first trades, Kazakhmys [KAZ.UK] and Rio Tinto [RIO.UK] outperforming following upgrades. Goldman commentary on the Euro steel sector, making cautiously positive statements sent ArcellorMittal [MT.NV] and ThyssenKrupp [TKA.GE] higher in first crosses. Buying enthusiasm quickly waned and by 3:30EST both the CAC and DAX had surrendered all their gains, moving into negative territory. Weakness at this time developed in pan-European automotive names following comments seen pre-market out of the Washington Post regarding a bankruptcy of GM and other concerns regarding OPEL bids and the potential changes in the European car market makeup. By 3:45EST all three major equity bourses had surrendered opening gains and had moved into negative territory. This equity weight was short-lived, however, as markets bounced positive on an extremely choppy session. Once turning positive, all markets continued that flow, in light volume, printing new session highs past 4:15EST. UK provision Q1 GDP data at 4:30EST saw markets pare some gains prior to the number as traders positioned themselves for the second of three Q1 readings. Provisional reading at -1.9% as expected accelerated the rally post 4:30EST. Into the 5:00EST hour equity markets have held on to gains in positive territory while trending off their best levels. Trading themes in this Friday morning session would be characterized by light volume, and choppy price actions ahead of a long US weekend.

***Reminder: US equity markets will be closed on Monday, May 25, 2009 in observance of Memorial Day Holiday

- In equities -GlaxoSmithKline [GSK] Company potentially involved in $1.9B IRS dispute - WSJ. IRS is said to object to company's tax transaction with a Swiss subsidiary. || Marston's [MARS.UK] Reported H1 Net £13.2M compared to estimates of £7.8M. Rev came in at £307.5M above the £295M consensus. || Bank of Ireland [BKIR.IR] Guaranteed Irish banks to be asked to establish subsidiaries to administer toxic loans being transferred to Nama according to a Irish Time articles. ||

- Speakers: BoJ Shirakawa commented that Japan's Q2 GDP to show "sharp" improvement on Q1 decline of -15.2%. He noted that the Japanese economy was performing in line with BoJ expectations. Capital increase in Japanese banks was an important step for stabilization. BOJ noted that the risk of an economic free fall was fading from previous levels but Japanese economic pick up would be dependent on demand trends. The drop in wages could weigh upon consumption. ||| India Central bank: No clear sign of turnaround in export demand.- If conditions remain calm, could experience economic turnaround by end of 2009. As economic growth picks up, liquidity will have to be absorbed; such challenge is not as daunting for India compared to other countries. New Gov't might pressure more fiscal stimulus and large Gov't borrowings run against central bank's effort to keep interest rates low. Can manage Gov't borrowing in an orderly manner ||| OECD's Gurria noted that some economic indicators have demonstrated improvements but added the risk that the economic crisis could be prolonged without fiscal discipline. He did the US economic recovery could be faster than any one taking place in Europe. He also commented that he saw no justification for UK sovereign rating cut at this time |||

- In Currencies: Continued concerns over the implications of a potential US sovereign rating downgrade continued to weigh upon the USD sentiment. Dealers noting that next weeks Treasury auction size and rating fears have scare away any prospect of any near-term dollar recovery. One dealer noted that the recent trend of Equity-dollar price movement correlation might shift to towards a stronger Bonds/dollar correlation. The EUR/USD approached the 1.4000 level during the session,a level last tested back on Jan 2nd. The dollar's soft tone lingered over the concerns that the "AAA" US sovereign rating could come into question thanks to the revisions to the deficit projections. On Thursday, the Congressional Budget Office (CBO) commented in early NY that its March economic forecast was too optimistic and that any economic recovery could take several years. CBO also saw US jobless rate peaking above 10% in 2010 from the current level of 8.9%. Currency and fixed-income dealers noted of the potential of higher US budget deficits from this revision in growth. This brought back comments from May 11th when the Obama Administration revised its forecast for the 2009 federal deficit to $1.84T from $1.752T, while the 2010 deficit was also nudged higher, to $1.258T from $1.171T. Dealers have noted that comments from Fed Chairman Bernanke talking up the dollar were presumably designed to help fund massive deficits in the wake of the revisions, hence the dollar dilemma. The USD/JPY briefly tested below the 94.00 level where some good buying surfaced (Chatter of Far Eastern names). USD/CHF was softer and tested below the 1.09 level.

- The GBP was also softer against the major pairs due to reports that U.K. Treasury refused to release stress tests on RBS and Lloyds that the Financial Services Authority (FSA) carried out earlier this year. Reportedly the UK Treasury commented that disclosure of the results "at this time may lead to uncertainty in financial markets, either in relation to specific institutions or more generally," GBP/USD was off over 100 pips at one time to test 1.5760 before consolidating its losses.

-In Fixed Income: Bunds have under performed this morning, losing out most in the game of catch up with Treasuries, which were aggressively sold yesterday post NY Fed intervention. The yield on the Bund is higher by about 7bps at 3.51%, but the Bund is now just 18bps cheap relative to the 10y Note compared to 29bps on Thursday. Gilts are still weaker, however, with the 10y Gilt is now 35bps cheap relative to the 10y Note compared to 29bps yesterday. European Interbank rates increased for the third successive day, with 3-Month Euribor higher by another 0.7bps at 1.259%.

- I n Energy: Reportedly Russia will not attend the May 28th OPEC meeting

- Credit Crisis: Business Week article noted that Pension Insurer's might need aid as corporate bankruptcies increase . The article noted that the government agency that insures the pensions of 44M Americans has amassed a record $33.5B deficit, triple what it was six months ago.

*** NOTES ***

- Moody's: Comfortable with US AAA now but not guaranteed forever. Dealers noting that there are clear long-term pressures.

- US bank regulators close Bank United in biggest bank failure this year.

- Washington Post reported that the Obama administration could send GM into bankruptcy next week. However, US Treasury commented that there were no plans to send GM into bankruptcy ahead of Jun 1 deadline.

- US Pension Insurer may need aid as corporate bankruptcies increase as it accumulates $33.5B deficit

- BoJ leaves its interest rates and upgrades view on economy and says its likely to stop deteriorating. It expands it acceptance of collateral

- Fed's Plosser (non voter) noted that the economy not yet ready for an interest rate hike yet but will have to at some point. US default chances remote.

- Japans Fin Min Yosano: Not planning to intervene in FX markets

- Looking Ahead:

- 8:30 (CA) Canadian Mar Retail Sales M/M: % v 0.5%e; Retail Sales less Autos M/M: % v -0.1%e

- (RU) Russian Apr Unemployment rate: % v 10.2%e

- (RU) Russian Apr retail Sales M/M: % v 5.6% prior, Y/Y: % v -5.2%e


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AA: Major, A: High, B: Medium

Tue 31 July 2018
AA JP- Bank of Japan
A 06:00 DE- Retail Sales
A 09:00 EZ- flash HICP/GDP
AA 12:30 US- Core PCE Deflator
A 14:00 US- CB Consumer Confidence
Wed 1 Aug 2018
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AA 12:15 US- ADP Private Payrolls
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AA 18:00 US- Federal Reserve Decision
Thu 2 Aug 2018
AA 11:00 GB- Bank of England Decision
A 13:30 US- Weekly Jobless
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A Final Services PMIs
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A 12:30 US/CA- Trade

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