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Forex Blog - European Market Update: German IFO data points to stabilization; ECB Nowotny: likely to keep interest rates steady into 2010; IMF and World Bank maintain cautious views on potential recov

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

European Market Update: German IFO data points to stabilization; ECB Nowotny: likely to keep interest rates steady into 2010; IMF and World Bank maintain cautious views on potential recovery

*** ECONOMIC DATA ***

- (SZ) Swiss M3 Money Supply Y/Y: 4.2% v 3.4% prior

- (DE) Danish June Consumer Confidence Indicator: -5.5 v -3.0e

- (GE) German June IFO - Business Confidence Indicator: 85.9 v 85.0e; Current Assessment: 82.4 v 83.0e; Expectations: 89.5 v 86.9e; Sees economy gradually stabilizing

- (IT) Italian Apr Industrial Orders M/M: -3.7% v 0.1%e; Y/Y:%-32.2 v -27.2%e

- (IT) Italian Apr Industrial Sales M/M: 0.0% v -0.1%e; Y/Y: -22.2% v -22.6% prior

- (IT) Italian Apr Current Account: -€2.74B v -€2.27B prior


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

- Equity markets in Europe opened mixed but rapidly turned to the downside through the first 15min of trade. Positive sentiment out of Asia seemed to be ignored with focus instead remaining on negative comments out of World Bank Chief Economist Lin, who cut 2009's global GDP outlook and increasing the 2009 expected Euro Zone contraction to -4.5% from a previous -4.2%. Comments from the ECB's Nowotny just past 3:00EST accelerated equity weight, with bearish comments on the future of rate levels and further cautionary statements on current signs of stabilization. This negative sentiment had a strong downward effect on industrial and export names across Europe with steel and automotive names trading lower. Friday's statements out of Lufthansa [LHA.GE] regarding further cost cuts and continued funding concerns from BA [BAY.UK] over the weekend out of the UK press dragged airline names lower. Banks and financial names moved to the downside on the back of Nowotny and Lin's commentary regarding future growth and persistent concerns regarding the health of the global economy. Mining and basic resource names continued to provide M&A activity as weekend confirmation from Anglo American [AAL.UK] that it had been approached by Xstrata [XTA.UK] for a potential $34.6B 'merger of equals' made those names buck the equity trend and trade higher. Equity markets trended lower through the 3:00ESt hour stabilizing ahead of the German IFO June release at 4:00EST. That number, came in ahead of expectation at 85.9, this figure provided a brief blip to equity trading before the downward trend resumed. Significantly, within 10 min of the IFO number, German industrial and export names were trading at lower levels than before the figure. This negative sentiment continued into the 5:00EST hr as equity bourses printed new session lows, the CAC led the downtrend at -1.50%, the DAX -1.3% and FTSE -1.25%. Volumes remained solid in the session with average trading levels broadly matched in the European morning. As the NY morning opened, equities continued to trend lower as hard and soft commodities moved sharply south even as the USD surrendered some it risk aversion gains.


- In individual equities, Xstrata/Anglo-American [AAL.UK] confirmed that it has received a preliminary approach from Xstrata. Talks are in preliminary stages and may not lead to a final deal, although any bid could be valued at as much as $34.6B according to the UK Times. Stake holder Glencore is aware of bid and supports operation. AAL is valuing the bid against continued operations. Segro made an offer for Brixton [BXTN.UK] at 1.750 share of Segro for each outstanding Brixton Share. Segro's offer would be accompanied by a further issue of new SEGRO shares in order to raise an additional £250M in cash. Yell Group [YELL.UK] may be required to revise its financial covenants to avoid breaching the agreements, according to the FT. Hammerson [HMSO.UK] CEO Richards said the UK commercial-property slowdown may be close to a bottom for the best properties and also stated that rents are falling more slowly. Headded that only 1.4% of the company's rental income is not being paid due to tenant insolvencies. RBS [RBS.UK] may sell Asian banking assets in multiple unit sales, according to the Times. Assets were acquired from Abn Amro following acquisition in 2007/08. The decision to sell units rather than regional operations come after talks to sell in block have reportedly stalled. Ireland plans to raise an additional €4B in funding for Allied Irish Bank [ALBK.IR]. The fresh capital will come from the Irish State national reserve fund that is currently valued at approx €20B. Air France [AF.FR] guided 2010 operating loss near €129M v loss €309.9Me (unclear if comp) on back of financial crisis, according to La Tribune. The article did not cite specific sources. S&P lowered ratings on Renault [RNO.FR] by two notches, to BB from BBB- (now junk status). Daimler is considering a potential stake in Porsche [PAH3.GE]; the company's spokesperson has called such reports "speculation." Germany looks set to turn down a request by Porsche for a state loan of €1.75B, according to the FT. A Lufthansa [LHA.GE] executive said that the airline needs to cut costs further in order to achieve positive operating results; oil price hurting forecasts. The executive noted that low volumes and prices have continued in Q2. Falling revenue due to lower volumes and prices continued across the sector in the second quarter of this year. SAP [SAP.GE] is holding preliminary level talks for acquisition of up to €1.5B, according to Welt am Sonntag. Siemens [SIE.GE] expects around $21B in new orders from global stimulus programs in the next three fiscal years. Green technologies are expected to account for 40% or about $8B of this total. Renewable Energy [REC.NO] sees 2009 module prices off 30% y/y, with wafer unit seeing requests from long term customers for contract alterations. Maersk's [MAERSKB.DE] CEO said the company will shift investments away from container ships and toward oil shipping and port facilities.


- In speakers: ECB's Nowotny commented that the central bank would likely keep interest rates steady into 2010 and purchase a small quota of covered bonds itself and hold them to maturity. He did not any need to expand the covered bond program for the time being. IMF's Blanchard stated that the global crisis has not ended but growth was possible by the end of 2009. He stated that the US recovery needed a net increase in export growth and this would require a USD adjustment. Swedish central bank, the Riksbank, noted that Swedish companies are seeing signs of economic stabilization and remain cautiously optimistic on the economy. The bank noted that Swedish companies saw lower wages and prices going forward. The IFO's Nerb stated that the downward economic trend in Germany has come to an end but that the current situation remains a concern. The IFO's Abberger stated that he would not describe latest rise in economic data as the "turning point." Abberger also said the rise in the IFO has been driven by better business expectations, but current situation index remained bad. The OECD's Gurria commented that the group's next economic forecast would not be worse than the prior forecast, and that inflation was not his greatest concern. The OECD reiterated that major economies would contract throughout 2009 and the issue of unemployment will linger. Gurria noted that not every country could afford a stimulus program and that both China and US must do their part.


- In currencies: the dollar maintained its broad 1.3800 to 1.400 range against the euro as the trading week commenced but held a steady tone during the European morning. EUR/USD was trading around the 1.3840 area and lower by some 85 pips from its opening levels in Tokyo. Euro was weaker against other major pairs as it hit fresh 6-month lows against the GBP at 0.8400 and back below the 133 handle against the JPY. Looking ahead Goldman Sachs strategist noted that Central bank events were 'sources of uncertainty' for currency direction. Goldman believes that equity and oilprice directopm might be USD drivers in coming week. Fed meeting and ECB funding might be Euro negative while reserve currency talk might be 'fat tail risk' for USD. Goldman remained 'comfortable' with long EUR/USD trade.


- In energy & commodities: OPEC's president commented that oil prices were satisfactory for both consumers and producers. Platts analysis showed that China's May oil demand had risen by 6% to 33.2M tons, second consecutive monthly rise and fastest rate of growth since August. The World Bank's forecast of a deeper global economic recession this year kept commodity prices subdued in the session. NYMEX Aug crude was down over $1.40 to test below the 68.60/barrel area on continued cautious growth comments by numerous government and central bank officials. Spot gold weighed down by pre-fix selling pressures as dealers were keenly aware of sell stops building below the $910/oz area. Copper and aluminum dropped the most in a week in London.


- In fixed income supply: US Treasuries have outperformed Bunds and Gilts on a cross markets basis this morning with yield curves on both sides of the Altantic undergoing some bull flattening. US 2-yrs and 10-yrs have moved back below 255bps, while they are back below 250bps in the UK. Order books are open on France's new 30-yr OAT to be sold via syndicate with the roll on the existing 30-yr indicated between 2 and 5bps. Dovish comments from the ECB's Nowotny gave a boost to the short end of the German yield curve, a move which reversed itself as the morning wore on. Traders also paid note to his comments that 12 month refi operations were generating "substantial interest" amongst banks, further reinforcing belief amongst many that borrowing costs are unlikely to be any cheaper going forward. Six month Euribor fixed at a new record low of 1.43%.


- Credit crisis: the WSJ's "Currency Trading" section wrote that the impact from the Fed statement this week might be limited, as optimism was being replaced by reality of economic malaise and stresses that clearer signs of Q3 economic recovery are still needed. Article noted that critical factors in decision are whether the Fed will commit to keeping low rates through 2009 in response to market estimates of tightening, and if the $300B QE amount would be increased China Premier Wen stated that the Chinese economy was now recovering firmly but that the PBoC Moderately loose monetary policy would continued to be applied. Wen noted that it planned to implement a thorough 10-sector stimulus plan.


***Looking Ahead***

- 8:00 (EU) ECB's Trichet speaks in Madrid

- 8:00 (HU) Hungarian Base Rate Announcement: No change expected, current Base Rate is 9.50%

- 8:00 (PD) Polish May Net Core Inflation M/M: 0.3%e v 0.4% prior, Y/Y: 2.7%e v 2.6% prior

- 8:30 (CA) Canadian Apr International Securities Transactions: C$5.500Be v C$6.849B prior

- 10:00 (UK) BoE's 30th reverse Gilt auction (targeting 2020 -2032 Gilts)

- 10:30 (IS) Israeli Base Rate Announcement: 0.50%e v 0.50% prior

- 11:00 (US) Fed Coupon purchase (targeting Dec 2013 - April 2016's)

 

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Amazing Trader EVENT RISK Calendar:

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12:30 US- Housing Starts & Permits
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08:30 GB- Retail Sales
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Fri 20 Oct
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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.



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