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Forex Blog - European market Update: Soft data components continue to improve; Euro-Zone Confidence at 6-month highs; S&P noted that early signs of recovery need to be treated with caution

Today 06:00am EST/10:00am GMT

European market Update: Soft data components continue to improve; Euro-Zone Confidence at 6-month highs; S&P noted that early signs of recovery need to be treated with caution


- (PH) Philippine Central Bank cuts its Overnight Borrowing rate by 25bps to 4.25%; as expected

- (GE) German Apr ILO Unemployment Rate: 7.7% v 7.7%e

- (SZ) Swiss Apr Trade Balance: CHF2.6B v CHF0.15B prior

- (FR) French Apr Housing Permits 3M/YoY: -22.6% v -17.6% prior

- (SP) Spain May Preliminary CPI Y/Y: -0.8% v -0.7%e

- (HU) Hungary Apr Unemployment rate: 9.9% v 10.0%e

- (SA) South Africa Apr PPI M/M: -0.2% v 0.4%e; Y/Y: 2.9% v 3.7%e

- (IT) Italian May Business Confidence: 68.7 v 66.1e, Retailers Confidence: 94.6 v 95.4 prior; Services Survey: -7 v -19 prior

- (SP) Spain Mar Total Housing Permits M/M: 10.3% v 9.1% prior; Y/Y: -52.8% v -60.3% prior

- (SW) Sweden Apr PPI M/M: -0.9% v 0.2%e; Y/Y: 3.2% v 4.3%e

- (SW) Sweden Apr Retail Sales M/M: 3.5% v 0.3%e; Y/Y: 5.0% v 0.3%e

- (GE) German May Unemployment Change: 1K v 64Ke; Unemployment Rate: % v 8.4%e

- (GE) German VDMA: Apr German plant equipment orders -58% y/y

- 5:00 (EU) May Business Climate: -3.17 v -3.10e; Consumer confidence: -31 v -30e; Economic Confidence: 69.3 v 69.0e; Industrial Confidence: -34 v -33e; Service Confidence: -23 v -23e

- (RU) Russia Gold & Forex Reserves rose to $402B on May 25th v $391.3B prior week - Central banker

- 6:00 (UK) UK CBI Quarterly Distributive Trade: -17 v +3 prior


- In equities: Equity markets opened to the downside for the second straight session. The heavy equity tone seen in the NY afternoon and through the Asian trading session carried into the European morning. Disappointing earnings out of UK listed names, including Wolseley [WOS.UK] and Man Group [EMG.UK] aided to the opening weight. News that Germany's OPEL decision would be officially delayed until at least Friday meant that uncertainly continued to move auto sector names to the downside [F.IT]. Steel names traded lower following comments out of Posco [PKX] that the group had accepted iron ore price cuts in line with Nippon Steel (-33% y/y) compared to the sought after -40% y/y. Markets opened below the -1% mark on first calls across Europe and held those ranges through the first 30 min of trade. Equity markets positioned themselves for German unemployment at 3:55EST by moving lower from the opening range. German May unemployment came in ahead of expectations, with a rate of 8.2% v 8.4%e but labor office comments that extraordinary effects in the accounting had lowered numbers muted the true effect of the number. VDMA comments on German industrial orders, seen at -58% y/y, the largest yearly decline since 1950, drove further selling into pan European industrials and export names. Market volumes remained depressed across European exchanges and this was represented by the choppy nature seen in both the DAX and CAX while the FTSE maintained a tight range throughout the session. Past 5:15EST, equity markets showed signs of recovery as both the CAC and DAX floated towards their best levels, down less than -1.0%. Trading patterns remained choppy on thin volumes.

- In individual stocks: RBS: [RBS.UK] According to FT, the plan to sell off some of its Asian assets is facing delays in securing bids. HSBC and Standard Chartered failed to place bids for RBS' retail and commercial operations in 8 Asian countries. ||Tesco [TSCO.UK] Moody's lowered its outlook to negative from stable; ratings reaffirmed at A3. Stated that debt protection rates were at increasing risk due to volatile cap markets. || Wolseley [WOS.UK] Reported 9 Month Pretax: £72M, which was down-80% y/y; Rev £12.1B +0.2% y/y; cutting FY CAPEX. Markets have continued to weaken in March and April against the background of deteriorating economic conditions. || Man Group [EMG.UK] Reports FY09 Net fee income $358M v $936M y/y, AUM $46.8B v $74.6B y/y. ROE 13.5% v 41.6% y/y, || Tate & Lyle [TATE.UK] Reported FY09 Adj pretax £245M b £243Me, Rev £3.55B v £3.4Be. || Ahold [AH.NV] Reports Q1 Net income €196M v €236Me, Op profit €396M v €389Me, Rev €8.7B v €8.6Be. Q1 retail op margin 4.8%, Group is taking aggressive actions in CEE region, Have seen margins hold up in Dutch and US units. Took net provision of €66M on lease provisions. || ThyssenKrupp [TKA.GE] CEO: Seeking partners for a ship yard operation; eyeing consolidation in stainless steel -Manager Magazine. Offers CVRD a larger stake in Brazilian facility. Still seeking larger consolidation in stainless steel operations. ||

- Speakers: S&P Senior Analyst commented that the US AAA sovereign rating was not under immediate threat. The agency would comment on US sovereugn ratings over the few days. S&P noted that the Obama Administration has a good plan to reduce debt and that the US economy remained highly resilient and flexible. S&P stated that the US economy would be one of the first nations to recover from recession. Thus S&P believes the US is supported by stronger medium term outlook ||| ECB Nowotny commented that there were signs of green shoots in economy and improvements in capital markets. He reiterated that he expected low rates of growth following crisis and bemoaned on the lack of EU penalty for excessive budget deficits|| RBA Board Member Corbett commented that he would not necessarily support more fiscal stimulus. He expected more quarters of economic contraction, but saw the economy near a turning point ||| Polish Central Banker Filar commented that CPI could hit 2.5% next year. He did not rule out any change in the central bank's easing bias but noted that any interest rate hikes was unlikely. He saw Q1 GDP well above the 0.0% level with economy bottoming out in Q2 ||| Czech Central Banker Singer commented that further interest rate cuts were possible if ECB lowered their refi rates. He also noted that disinflation and any deepening of the global crisis could also spur additional interest rate cuts ||| Turkish Banking Regulator commented that he saw profits at domestic banks in-line with 2008 levels and noted that the bad loans ratio rising to 7% to 8% of bank assets by the end of 2009 under a 'worst case scenario' ||| German Labor Min Weise stated that the German jobless total unlikely to hit 4M in 2009 ||| Russian Central Bank Ignatyev commented that interest rate could be cut again in June. He noted that it might sell US Treasuries and purchase IMF bonds. He noted that Russia could experience some deflation in some months during 2009 and that the Russian economy can restore growth in Q2 or Q3. Capital outflows might be much lower than $70B forecast for 2009. Lastly, the central banker noted that further appreciation by 1-2 rubles against the basket will be concern || S&P Analysts commented on European European economic prospects as it trimmed its 2009 Euro-zone GDP estimate to -4.25% from -4.0% prior. It noted that a period of low growth seen lasting through 2010 and that growth could slowly edge upwards in next few quarters. S&P noted that early signs of recovery need to be treated with caution as they saw forces against consumer spending to continue to rise, specifically rates of job losses. S&P noted that it was unwise to expect a strong economic upturn

- In Currencies: The JPY maintained a softer tone during the European morning. The USD/JPY pair moved above the 97 handle for the first time since May 13th. Dealer took notice of two large Toshin funds being launched yesterday and rumored to total $2.7B. Dealers' noting that money was 'leaving Japan in search of higher yields'. EUR.JPY was up almost 200 pips at 134.10, GBP/JPY at 154.20, up 170 pips from its opening levels in Asia.

- The Euro retraced some of its losses encountered on Wednesday. German May unemployment number came in better than expectations and rose just 1K and was much better than expected 64K increase expected. The release also followed the improvement in Italian May business confidence. EUR/USD at 1.3870 area, up 40 pips from its Tokyo open.

- The commodity-related currencies moved into positive territory ahead of the NY morning. USD/CAD trading at 1.1180 and AUD/USD at 0.7830 area. NYMEX crude little changed from its pit-trading close of 63.45 and Gold holding steady at $950/oz.

-In Fixed Income: Government bonds are weaker in Europe this morning with bear steepening a common theme on both sides of the Atlantic. Having moved below the all time high of 275bps in treasuries, 2s10s are at record highs of 268pbs in Gilts at the time of writing, and at their widest level since 1997 in Germany at 225bps. Gilts have under performed, whilst the Bund has traded at or above parity with the 10y Note throughout the session. Italy sold €7B in 3 and 10y BTPs and €1.8B in floating rate BTPs with typically robust results. The UK successfully sold £1.25B in 2023 linkers, with results in line with previous auctions. 3M Euribor fixed steady 0.94% where it appears to have reached a floor, whilst € swap spreads are wider in the belly and longer parts of the curve. || Dealers noting widening of spread within Euro-Zone members. Spread between Italian/German 10-year was at +103bps, around 3.5bps wider this session, while the spread between Greek/German 10-year widened by 6bps on chatter on reopening of Greek 10-year issue

- I n Energy: OPEC President Vasconcelos commented that it was better to wait to cut at this time before making any new output cuts. ||Qatar Oil Min stated that OPEC would not cut production at today's meeting ||

- Credit Crisis: FSA statement on its use of stress tests: UK authorities have not applied stress testing in the same way as in the US. FSA's noted that its use of stress tests has not been a one-off exercise, but instead embedded in our regular supervisory processes, the FSA will not, as a matter of practice, be publishing details of the stress test results. The current stress scenario models a recession more severe and more prolonged than those which the UK suffered in the 1980s and 1990s and therefore more severe than any other since the Second World War. It assumes a peak-to-trough fall in GDP of over 6%, with growth not returning until 2011 and only returning to trend growth rate in 2012. It models the impact of unemployment rising to just over 12% and, crucially, the impact of a 50% peak-to-trough fall in house prices and a 60% peak-to-trough fall in commercial property prices.

*** NOTES ***

- S&P Senior Analyst: US rating not under immediate threat, will comment on US rating in next few days

- OPEC meeting in Vienna today with no additional output cuts expected from the total of 4.5M enacted since Sept. Compliance seen as key

- US stimulus not pushing down the long end of the curve. The U.S. will need to sell $3.3 trillion of Treasuries FY ending Sept. 30 to fund bank bailouts, stimulus spending and a record budget deficit. Seven year leg today

- Euro-Zone Consumer confidence at 6-month high; S&P noted that early signs of recovery need to be treated with caution

- Looking Ahead: US claims data, New Home sales and oil inventory data expected. OPEC communiqué also expected

- 7:00 (BR) Brazil May FGV Inflation M/M: 0.1% expected versus -0.2% prior

- 8:30 (US) Apr Durable Goods Orders: 0.5% expected versus -0.8% prior; Ex Transportation: -0.3% expected versus -0.7% prior (revised)

- 8:30 (US) Initial Jobless Claims: 628K versus 631K prior; Continuing Claims: 6.745M expected versus 6.662M prior

- (SA) South Africa Central bank interest rate decision: Consensus expectations is for a 100bps cut to 7.50%

- 9:00 (CL) Chile Apr Copper Production Total: No extimate versus 429.6K tons prior

- 9:30 (BR) Brazil Apr Primary Budget Balance: 12.3B expected versus 11.6B prior

- 10:00 (US) Apr New Home sales: 360K expected versus 356K prior



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