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Forex Blog - European market Update: Continued cautious remarks from various government and central bankers on sustainable economic recovery

Today 06:15am EST/10:15am GMT

European market Update: Continued cautious remarks from various government and central bankers on sustainable economic recovery


- (JP) Japanese Cabinet Office Monthly Economic Report: raises its economic assessment; Removes 'worsening' description from economic view

- (SZ) Swiss Apr Retail Sales Real Y/Y: 1.2% v 1.2% prior

- (CZ) Czech Apr Current Account (CZK): 9.9B v -4.50Be

- (UK) Bank of England Minutes: Voted 9 to 0 to keep interest rates at 0.50% and maintain quantitative easing level at £125B

- (UK) May Claimant Count Rate: 4.8% v 4.9%e

- (UK) May Jobless Claims Change: 39.3K v 60.0Ke

- (UK) Apr Avg Earnings inc Bonus: 0.8% v 0.2%e; Ex Bonus: 2.7% v 2.8%e

- (UK) Apr ILO Unemployment Rate: 7.2% v 7.3%e

- (UK) Apr Manufacturing Unit Wage Cost: 9.4% v 9.8% prior

- (SZ) June Swiss ZEW Expectations Survey: +9.4 v -3.9 prior

- (SA) South African April Retail Sales Constant Y/Y: -6.7% v -5.6%e

- (EU) Euro-zone Apr Trade Balance: €2.7B v -€1.5Be ; Trade Balance sa: -€0.3B v -€1.5Be

- (EU) April Construction Output M/M: 0.6% v -1.0% prior, Y/Y: -4.7% v -8.7% prior


- In equities news overnight: In equities: European equity markets opened to the downside following a heavy pre-market session. Losses in Europe followed a mixed Asian session. Initial trading showed weakness in heavy industrial and export names. Bearish comments out of SSA Svenskt Stal [SSABA.SW] regarding continued low capacity levels and apprehension ahead of ArcelorMittal's [MT.NV] EGM dragged pan-European steel names lower. Basic resource and miners traded lower with comments out of the Chinese media purporting that China would seek measures to prevent a JV between BHP Billiton [BLT.UK[ and Rio [RIO.UK]. Pre-market earnings out of Atkins [ATK.UK] and Sainsbury [SBRY.UK] beat expectations, but plans by the UK grocer for a £445m pound capital raise sent those shares lower. Statements out of S&P raising their credit loss expectations to double the €128B seen in 2008 for European banks provided some muted pressure to the financial sector. RBS [RBS.UK], however, managed to buck this trend following statements in yesterday's session in which the CEO outlined expectations to pay the UK's 70% stake in firm down to 0% in 5-yrs. Choppy trading continued through the 3:00EST hour with the FTSE pushing back to the unchanged level before markets began an extended decline post 4:00EST. Equity markets moved lower in expectation of economic data and central bank comments out of the UK expected at 4:30EST. UK May jobless claims were reported below the expectation (better than expected) level and April avg earnings showed continued improvement. This data halted the equity slide only temporarily. As BoE minute comments, stating current confidence levels remain fragile and that there is no sign of quick credit market recovery, markets again moved south. Considerable weight in industrials (steel heavy), basic resource and utility names pushed markets to new lows by 5:00EST. Positive Swiss and Euro-zone data at 5:00EST failed to halt the equity slide as bourses moved below the -1.0% by 5:30EST

-In individual equities; (EU) According to a S&P report, credit losses for the largest 50 banks in Europe will be almost double the €128B of credit losses posted in 2008. The report notes that European banks' profits may be hurt by rising bad loans from corporate and consumer lending for the next 2 years. || Sainsbury [SBRY.UK] Reported Q1 Rev +3.2% y/y and up 7.6% ex fuel.. It announced a capital raise program of £445M (7.6% of market cap). It Q1 LFL +2.5% y/y (+7.0% ex fuel v 6.4%e). To issue new ordinary shares of 28 4/7p each in the co to raise approx £255M, to make an offering of approx £190M principal amount of convertible bonds due 2014. To buy additional 9 stores from cooperative group. || WS Atkins [ATK.UK] Reported FY09 Pretax £102.7M v £97.8Me, Rev £1.5B v £1.4Be, proposes final dividend of 17.25p/shr. A number of projects were cancelled during the third quarter, necessitating a re-sizing of the business in the fourth quarter of the year. || SSA Svenskt Stal [SSABA.SW] Saw continued weakness in the steel market but its overall outlook remained unchanged. Production and deliveries continue at low levels and utilization rates are clearly below 50%. || Tate & Lyle [TATE.UK] Named Javed Ahmed named new CEO, effective October 1. || Royal Bank of Scotland [RBS.UK] CEO Hester: Pace of decline at bank has moderated; UK economy has long way to go towards recovery. Goal is to bring UK gov stake down to 0% by 5 years (current stake 70%) || British Airlines [BAY.UK] Union has reportedly rejected Mgmt calls for workers to work for free temporarily; says workers cannot afford to do so. || British American Tobacco [BATS.UK] Acquired a 85% stake in Indonesia's Bentoel International for $494M or IDR873/share. || Aeroports De Paris [ADP.FR] Reported May Traffic -6.3% v +6.7% y/y. Maintains view that 2009 earnings will be in-line with 2008 results but lowered its FY EBITA view. || Danone [BN.FR] Mulling purchase of Argentinean firm La Serenisma -La Nacion. || Iberdrola [IBE.SP] The company's €1.25B capital increase (4.2% of market cap) announced on Tuesday will be extendable to up to €1.5B, if necessary - Expansion. || Swiss Re [RUKN.SZ] Update: Has completed sale of US Connecticut based Asset Management Unit. || Synthes Inc [SYST.SZ] US DoJ charged four execs at Norian unit for unlawful clinical trials of medical device -WSJ. || Addecco [ADEN.SZ] Group might suffer impairment charge in H2 on the back of on-going restructuring -Finaz & Wirtschaft. ||

Speakers: ECB's Constancio stated that the current economic crisis was 'more structural' than others and not simply a cyclical crisis. He cautioned that there are risks of a prolonged period of economic weakness. US external imbalances must be addressed or more problems would result. He noted of uncertainty over future consumer behavior and added that the financial sector would not be growth engine in coming years. He also made some comments on the dollar. Constancio noted that there was a problem with USD's international role and acknowledged China and Russia's talks of a new reserve currency. Constancio stated that some depreciation in the USD was desirable, but any large decline in the USD FX rate would cause problems for the global economy||| China's Premier Wen Jiabao commented that economic conditions have stabilized but that the potential recovery was at a critical juncture. He noted that the "moderately loose" monetary policy in effect since last November would continue and to continue to restructuring the Chinese economy. Thus he expressed that policy would be more forward looking || Russian PM Putin commented that China's BRIC summit proposals were deemed 'constructive' and that ties between the countries were not affected by crisis ||| China President Hu commented that countries should diversify international monetary system; Should improve management of reserve currency issuance ||| Swedish Fin Min Borg commented that the country continues to have resources and ability to deal with any Latvian crisis and ready to act forcefully on crisis. He did note that the primary responsibility of banks lies with their private owners ||| Swedish Think tank NEIR revised 2009 GDP view to -5.4% from their -3.9% forecast made back in March. ||| Spain's Saving Bank Association: Expects losses in Spanish banking system in 2010 ||| Japan Fin Min Yosano commented that the Jan-Mar period was 'clearly' the bottom for Japanese economy ||| BOE June 4th minutes noted that the recent spat of data was mostly encouraging but confidence remains fragile. Trough in the global economic activity might be reached soon and the sharp contraction risk has somewhat receded. However, the BOE cautioned that significant risks both domestically and overseas remain for its medium term outlook. Growth in household and corporate lending was subdued and 'remains constrained' and no clear sign that credit would recover quicker than predicted. Q2 consumer spending decline might be less than expected but a risk of pronounced increase in domestic savings rate ||| Japan's Cabinet June report raised its view of both exports and imports sectors and saw positive developments in industrial output and consumer spending. It lowered its view on capital expenditure (CAPEX) and housing starts. The government noted that the economy remain in difficult territory, but saw some signs of economic pick-up. The Cabinter raised its overall assessmrn for Japan and removed the 'worsening' description from economic view

In Currencies: The USD opened the European morning on a soft note but maintaining its recent 48-hour trading range. The EUR/USD continues to stall at the 1.3930 area , where alleged Far East sovereign names have been seen offering Euros. In Asia there were reports of Eastern European names as 'aggressive' buyers of Euro around the 1.3800 area. Thus the current consolidation phase. The USD was also helped by some risk aversion as continued cautious comments emerge from notable global officials and central bankers. China's Premier Wen Jiabao commented that economic conditions have stabilized but that the potential recovery was at a critical juncture and ECB's Constancio noted that risks of a prolonged period of economic weakness remained and that US external imbalances must be addressed or more problems would result. Constancio noted that there was a problem with the USD's international role and acknowledged the recent discussions between China and Russia's for calls of a new reserve currency

- The GBP experienced some choppy price action following the release of the claimant count data and BOE minutes. Dealers noted that some cautious comments in BOE minutes weighed upon sentiment despite the better jobs number out of the UK. BOE noted that significant risks both domestically and overseas for medium term outlook. Growth in household and corporate lending was subdued and 'remains constrained' and no clear sign that credit recovery was quicker than predicted. The BOE noted that Q2 consumer spending decline might be less than expected but risk of a pronounced increase in domestic savings rate . GBP/USD probed the 1.65 neighborhood prior to the data release but fell to 1.6250 area in the aftermath.

- The JPY was mixed and exhibited choppy price action as well. Both the BOJ and the Japanese Cabinet raised the economic assessment for Japan and removed the term 'worsening' from their economic view. The JPY was firm during the Asia session but maintained a weaker tone during the European morning. The rising risk aversion sentiment ahead of the NY morning having the JPY move off its worst levels against the major pairs. USD/Jpy at 96.20, GBP/JPY at 156.60 and EUR/JPY at 133.4

- In Energy: Chinese Pres Hu: Chinese/Russian cooperation on oil operations is breakthrough || Spain's Industry Minister Sanz commented that they were studying applications for solar facilities with 100 applications for 4,300MW of thermosolar power plant || Russian Fin Ministry was mulling raising taxes on energy extraction operations from 2010 in a bid to raise an additional RUB50B for budget purposes.

In Fixed Income Supply: The revival in government bonds has continued this morning in Europe, with Bunds and Gilts both bid across the curve. Gilts are outperforming as the both the British pound and FTSE slump. There is nervous anticipation ahead of a speech by Chancellor Darling's this evening, where he is expected to talk a harsh tone in support of regulation of the UK financial sector. Treasuries are experiencing some corrective selling ahead of May CPI figures, leading to wider cross market spreads, with the US benchmark 15bps rich to the 10y Gilt and 20bps cheap relative to the 10y Bund at the time of writing. Germany sold €5.8B in 2y Schatz' with satisfactory results, and the Bundesbank retained 17% of the offering for market intervention, below the 20% threshold seen in most recent auctions. Three month Euribor improved by 1bps to fix at 1.24%.

Credit crisis: Moody's issued a report on the CEE. It noted that the ratings of Central and Eastern European Government related issuers face increasing negative pressure. The severe macroeconomic recession, deteriorating government financial strength and regional banking crisis have led to 18 negative sovereign rating actions on CEE governments, causing an unprecedented 11 downward rating actions on these companies partially or fully owned by the state. Cautions that as more than 40% of CEE GRIs are sensitive to the potential downward rating movements of their respective governments, further future rating changes should be expected, as around one-third of sovereign ratings in the region carry a negative outlook

*** NOTES ***

- The session saw continued cautious remarks from various government officials and central bankers despite continued improvements on most data fronts. China PM Wen expressed that the potential economic recovery was at a critical juncture

- Japan Q1 Household Assets: ¥1,410T (-3.7% y/y)

- Fitch said that it will maintain Japan's sovereign rating even after the government abandoned its goal of balancing its budget by 2011.

***Looking Ahead***

- (RU) Russian May Unemployment Rate: 10.3%e v 10.2% prior

- (RU) Russian May Retail Sales M/M: No expectations v -0.2% prior, Y/Y: -6.2%e v -5.3% prior

- 7:00 (US) MBA Mortgage Applications w/e Jun 12th: No expectations v-7.2% prior

- 8:00 (NO) Norwegian Interest Rate Decision: No change expected, current Deposit Rate is 1.50%

- 8:00 (PD) Polish Apr Current Account: €160M expected v €75M prior, Trade Balance: -€179M v -€77M prior

- 8:30 (CA) Canadian April Wholesale Sales M/M: -0.5%e v -0.6% prior

- 8:30 (CA) Canadian May Leading Indicators M/M: -0.6%e v -1.1% prior

- 8:30 (US) May CPI M/M: 0.3%e v 0.0% prior; Y/Y: 1.8%e v 1.9% prior,

- 8:30 (US) May CPI Ex Food & Energy M/M: 0.1%e v 0.3% prior, Y/Y: 1.8%e v 1.9% prior

- 8:30 (US) May CPI Core Index: No expectations v 218.594, Consumer Price Index NSA: 214.445e v 213.240 prior

- 8:30 (US) Q1 Current Account Balance: -$85.0Be v -$132.8B prior

- 9:00 (US) Fed's Bernanke speaks at financial literacy event in Washington

- 10:00 (UK) BoE to conduct reverse auction of 2015 - 2019 Gilts

- 11:00 (US) Fed to conduct coupon purchase of T-Notes maturing between 05/15/2016 - 05/15/2019


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