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Forex Blog - European Market Update: Nervous markets await US employment data; Baltic economic issues continue to simmer; UK's PM Brown future in doubt

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

European Market Update: Nervous markets await US employment data; Baltic economic issues continue to simmer; UK's PM Brown future in doubt

*** ECONOMIC DATA ***

- (SP) Spain Apr Industrial Output NSA Y/Y: -28.6% v -13.7% prior; Output WDA Y/Y: % v -19.7% v -21.9%e

- (CZ) Czech Q1 Avg Real Wages Y/Y: 1.0% v 0.4%e

- (HU) Hungary Apr Preliminary Industrial Output M/M: -5.1% v 4.3% prior; Y/Y: -25.3% v -21.9%e

- (SZ) Swiss May CPI M/M: 0.2% v 0.2%e; Y/Y: -1.0% v -0.9%e

- (SW) Sweden May Budget Balance (SEK): 16.7B v -2.4B prior

- (TT) Taiwan May CPI Y/Y: -0.1% v -0.3%e

- (NO) Norway Industrial Production M/M: -1.6% v -2.7%e; Y/Y: -4.0% v -1.6% prior

- (NO) Norway Industrial Production Manufacturing M/M: -1.4% v -0.8%e; Y/Y: -10.6% v -8.5%e

- (RU) Russian May Consumer prices M/M: 0.6% v 0.7%e; Y/Y: 12.3% v 12.5%e; CPI YTD: 6.8% v 6.9%e

- (RU) Russian May CPI Core M/M: 0.5% v 0.7%e; Core CPI YTD: 5.7% v 5.9%e

- (UK) May PPI Input M/M: 0.4% v 0.8%e; Y/Y: -9.4% v -8.3%e

- (UK) May PPI Output M/M: 0.4% v 0.4%e; Y/Y: -0.3% v -0.4%e

- (UK) May PPI Output Core M/M: 0.2% v 0.3%e; Y/Y: 1.2% v 1.2%e


*** SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM ***

- In equities: The word's in equities today were: mining, China and Rio Tinto. Weeks of speculation regarding the outcome of a proposed 15% Chinalco stake in Rio Tinto [RTP.UK] have finally been laid to rest (to be replaced by new concerns regarding regulatory approval). During Asian/Australian trading hours, Rio announced: It was walking away from the Chinalco deal, Is to hold at $15.2B rights issue, Will enter a iron ore JV with BHP Billiton [BHP.AU] and!!! Reported its Q1 results. A slew of statements from all involved parties, governments and credit ratings have followed with the result that both BHP and Rio opened +10% in London, dragging the entire sector higher. Resulting currency unwinding issues involving the GBP,USD, AUD and CNY continue, and concerns of political backlash between China and Australia have been floated all in the wake of Rio's announcements. Other key equity drivers included perpetual fears regarding the Baltic states, specifically the declining fiscal situation of Latvia. An explosive article in the UK Daily Telegraph speculating Swedish part nationalization of exposed banks made the rounds, stressing not only Swedbank [SWEDA.SW] and Swedish names, but other banking firms with heavy CEE exposure including Raiffeisen [RIBH.AS]. Comments out of Goldman Sachs on the European construction sector led to mixed trading as those names with emerging market exposure moved higher (Lafarge [LG.FR]) while those with CEE and Scandinavian exposure moved lower [SKAB.SW]. Markets traded in high volatility in first trades, opening higher across the board, moving to +1.0% in initial trade. At 3:15EST, Swiss May CPI numbers for the y/y at -1% reported the lowest ever recorded reading halting the continental equity enthusiasm. The DAX and CAC moved sharply off their best levels while strength in the miners continued the upward momentum within the FTSE. Equity markets continued in their range with moderate volumes through the 4:00EST hour. UK data at 4:30EST was taken in stride but continental markets made sharp downward trends just before 5:00EST that corresponded with reported comments that the IMF would not be requesting further stimulus from European central banks. Just past 5:00EST, the German Bundesbank reiterated its view of a bleak -6.2% contraction in the German economy in 2009. This joint news pushed the DAX to the unchanged mark by 5:15EST. As of 5:30EST, the FTSE has maintained its upward levels +1.00% despite ongoing political turmoil with two cabinet ministers stepping down, while the CAC and DAX maintain a positive footing just above the unchanged mark.


In individual equities: Rio Tinto [RIO.UK] Announced $15.2B Rights Issue (about 21.4% of ADR's market cap) at 1,400p or A$28.29/share. Rio Tinto to offer 21 new shares for 40 existing shares. Says Chinalco deal will no longer be pursued, but Rio Tinto remains interested in future collaboration with Chinalco. To enter JV with BHP. Reports Q1 profit $1.6B (unaudited) v $2.9B y/y, Underlying profit $1.75B, Rev $9.5B v $13.2B y/y. 2009 iron ore production guidance unchanged at 200M tons, expects 2009 share of mined copper output at 780K tons || Vallourec [VK.FR] CEO: Very little visibility for 2009. Sees destocking coming to an end by 2010, expects sales and profits to fall in coming quarters as inventories are still at low levels. || SAP [SAP.GE] CEO Apotheker: Group could spend up to €5B on future acquisitions -Figaro. To continue model of mixed growth organic/acquisition). Have approx €2.5B in cash on hand, can raise that much in capital markets. || Debenhams [DEB.UK] Stake holders CVC and TPG have entered into lockup following open offer (lock up effective became effective after close, CVC used opportunity to sell 51M shares). Placing raised expected £323M. Shares placed at 80p (13% discount). Placees to acquire 161.6M new shares, 242.4M placed (total of 404M, 45% of current shares outstanding). CVC sold 51M shares at offer price, stake new approx 29M shares. CVC stake sale seen as surprise, were not aware of later than expected lock-up price. CVC's cut follows Merrill Lynch's exit form firm in 2007. || (UK) Retailer John Lewis weekly sales ending May 30 +3.3% y/y. 17 week sales +0.4% y/y. || Dragon Oil [DGO.UK] Shareholder Emirates National 'contemplating' buyout offer; Price would represent a marginal premium from close price. In prelim talks over buyout, Emirates currently holds 54% stake. || Renewable Energy Corp


- Speakers: ECB's Trichet commented that the ECB would act to quickly absorb liquidity when economic situation improves. He reiterated that any inflationary threat would be met in a timely fashion . Trichet commented that the Refi allotments were an "in-built" exit strategy and that banks would seek less credit when tensions ease. He labeled the Euro currency an anchor of stability. Reiterated that the 1.0% interest rate level ws 'appropriate' ||| IMF's Lipsky commented that Major currencies were currently 'reasonably well-balanced'. He noted that perhaps the worst of global economic and financial crisis was behind at this time but that a bottom might have not been hit just yet. He expressed hope for a return of economic growth in advanced economies by H1 2010. he noted that the emerging markets have weathered the economic and financial crisis relatively well. On Russia, he stated that the Russian Ruble currency exchange rate not a problem for Russia's economy in the short-term. He felt that the Ukraine program would be successful if implemented fully. MF expected Latvia currency peg to be kept but duly noted that Latvia situation was difficult. He noted that China might purchase $50B in IMF issued bonds |||Russian Economic Aide Dvorkovich commented that the country has seen signs of economic improvement. He noted there were no major signs of trouble in Russian corporate debt. He did confirm that there were some corporate defaults occurring at this time. There were major concerns about corporate debt last fall and conceded that not all Russian banks will survive crisis. He expected 2009 GDP contraction to be below IMF expected 6.5% level. -He commented that currency discussions were important and that regional currencies have strengthened. Lastly If he noted that if Russian 2009 inflation fell below the 10% level, interest rates could be cut by further 100bps ||| Polish Central Banker commented that the economic crisis in Lativa creates dangerous spillover ||| Spanish PM Zapatero stated that he expected to see decline in jobless levels to continue into June reading ||| UK PM Office confirms cabinet reshuffle details later today ||| EU's Almunia stated that Central and Eastern Europe face funding challenges ahead and that the EU ws doing everything in its power to help soften the crisis inside Central and Eastern Europe (CEE). ||| Germany Bundesbank forecasted that 2009 GDP seen contracting by 6.2% with 2010 growth projected to be flat. There are some signs that economic slowdown has eased but big chance that it could encounter setbacks.It noted that the recession usually last a long time and that the recovery process will be slow. Ther are signs that the slowdown has eased but prepared for setbacks. German unemployment to reach 10.5% next year. Bundesbank noted that German annual CPI could be temporarily negative over the next few months. German companies are postponing or cutting wages ||| ECB's Weber stated that the economic outlook remained uncertain and that the current "Green shoots" did not hide regulatory shortcomings. Weber stressed that countries must use the current window of opportunity for enacting reforms


- In Currencies: the GBP continued its soft tone on political uncertainty spreads in UK.. Earlier today cabinet member James Purnell's resigned and told Prime Minister Brown to step down, the first government member to do so. UK Defense Min John Hutton also resigned. Dealers noting that incoming results of yesterday's local and European elections in the U.K. will be a key focus as an expected bad result for Brown's labour party will strengthen the odds of him stepping down. Dealers also cite some other facets behind the soft GBP currency. The WSJ had an article regarding that HSBC Faces Round Two of Subprime Punishment" and an FT opinion piece that the UK has bigger problems that government expenses ie its fiscal position. GBP/USD holding above the 1.6030 level, off some 60 pips from its opening level in Asia. EUR/GBP back above the 0.88 handle and traded as high as 0.8868 before retracing. The Swedish Kroner (SEK) currency maintained a soft tone following the situation developing in Latvia. There is press speculation that perhaps

Sweden was preparing to part-nationalize banks exposed to Baltic states as the economic situation intensifies. Also chatter that the IMF would present an outline of potential steps/recommendations this weekend for Latvia, and could include a devaluation of the LAT currency.

- The USD was steady for the most part ahead of the key US employment data expected. IMF's Lipsky commented that the major currencies were currently 'reasonably well-balanced'. Russian Pres Medvedev reiterated the call for a new reserve currency, and added that it was time to reconsider the role of gold played in international reserves. EUR/USD holding below the 1.4200 for most of the session and dealers continue to note the role of key support at 1.4050 ahead of the US data.


-In Fixed Income: China's FX regulator SAFE commented that it was "actively considering" purchasing $50B of IMF bonds ||| Government Bonds are weaker this morning in Europe, with greater selling of short dated issues leading to flatter yield curves in both Germany and the UK. In treasuries, yields are higher across the curve as shorts get in ahead of non farm payolls data. the yield on the 10y Note has inched higher by another 2 basis points to 3.73% Three month Euribor shot up by a basis point to 1.27%. ||| Dealers noting for all of GBP currency volatility over the last few sessions, Gilts have been relatively stable and have actually been able to outperform both Bunds and USTs


- I n Energy: IEA Tanaka: Reiterates that does not see much recovery in demand for oil


*** NOTES ***

- Lots of comments regarding Eastern Europe in the session with the Latvia situation highlighted and the impact on the Swedish banking system

- UK political scene a mess, PM Brown will announce a cabinet reshuffle at some point today

- China noted that it was interested in buying $50B in IMF bonds….dealers noting in exchange for what?

- US employment data will be the focus with continued 26-year highs expected


- Looking Ahead:

- 7:00 (CA) Canada May Unemployment Rate: 8.25 expected versus 8.0% prior; Net Change in Employment: -36.5K expected versus +35.9K prior

- 8:30 (US) May Nonfarm payrolls: -520K expected versus -539K prior; Manufacturing payrolls: -150K expected versus -149K prior

- 8:30 (US) May Unemployment Rate: 9.2% expected versus 8.9% prior

- 8:30 (US) May Average Hourly earnings M/M: 0.1% expected versus 0.1% prior; Average Weekly Hours: 33.2 expected versus 33.2 prior

- 15:00 (US) Apr Consumer Credit: -6.0B expected versus -11.1B prior

 

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Amazing Trader EVENT RISK Calendar:

Wed 18 Oct
12:30 US- Housing Starts & Permits
14:30 US- EIA Crude
Thu 19 Oct
01:30 AU- Employment
08:30 GB- Retail Sales
12:30 US- Weekly Jobless
Fri 20 Oct
12:30 CA- Retail Sales & CPI
14:00 US- Existing Homes Sales

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  • POTENTIAL PRICE RISK: HIGH Tue-- 08:30 GMT GB- CPI top tier confirmation of Inflation.

  • POTENTIAL PRICE RISK: Medium Tue-- 09:00 GMT DE- ZEW Survey second most important German monthly Survey.

  • POTENTIAL PRICE RISK: Medium Tue-- 09:00 GMT EZ- final HICP revision to flash report. Revisions are usually minor.

  • POTENTIAL PRICE RISK: Medium Tue-- 13:15 GMT US- Industrial Production. Top output indicator.



  • POTENTIAL PRICE RISK: Medium Wed-- 12:30 GMT US- Housing Starts and Permits revision to flash report. Useful housing leading indicator.

  • POTENTIAL PRICE RISK: Medium Wed-- 14:30 GMT US- EIA Crude. Top WTI inventory measure.



  • POTENTIAL PRICE RISK: Medium Thu-- 01:30 GMT AU- Employment. Top economic indicator.


  • POTENTIAL PRICE RISK: Medium Thu-- 02:00 GMT CN- GDP. Top economic indicator.


  • POTENTIAL PRICE RISK: HIGH Thu-- 08:30 GMT GB- Retail Sales. Top consumption indicator.


  • POTENTIAL PRICE RISK: Medium Thu-- 12:30 GMT US- Weekly Jobless. Employment Indicator.



John M. Bland, MBA
co-founding Partner, Global-View.com

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