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Forex Blog - European Market Update: Profit taking hitting most markets; BOE minutes noted that MPC unanimously left interest rate and £125B QE measures unchanged

Today 05:56am EST/09:56am GMT

European Market Update: Profit taking hitting most markets; BOE minutes noted that MPC unanimously left interest rate and £125B QE measures unchanged



- (FR) French Jun Consumer Spending M/M: +1.4% v 0.3%e; Y/Y: +1.2% v -0.3%e

- (TT) Taiwan Jun Unemployment Rate: 5.9 v 5.9%e

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

- (EU) Euro-zone May Industrial New Orders M/M: -0.2% v 1.9%e; Y/Y: -30.1% v -27.9%e

- (UK) U.K. CBI Quarterly Industrial Trends Total Orders: -59 v -51 prior


- European bourses opened on a positive tone following continued gains during the Asian session. This strength mirrored the NY trading day, which saw unexpectedly positive earnings from Caterpillar [CAT] in the pre-market and then expectedly strong earnings out of Apple [APPL] in the post-market. Equity interest soon waned, however, as markets and traders eyed the prospect of a potential pull back after seven consecutive up sessions. Heavy sentiment in the banking sector, particularly in the
UK followed a research note from JPMorgan stating RBS [RBS.UK], Barclays [BARC.UK] and HSBC [HSBA.UK] would need to provision additional billions for their investment bank operations following revised UK regulatory rules. Comments regarding potential levels of non-performing assets in those banks leaked into sentiment for the broader financial sector. Apprehension regarding earnings out of Fiat [F.IT] expected past 6:00amEST has led to weight in the pan-European auto-sector with German names continuing to underperform. BHP Billiton's [BHP.AU] Q4 production stats, showing a drop in iron ore output (the opposite from Rio Tinto's [RIO.UK] iron ore production stats) encouraged weight in the sector that had been a leading upside mover over the past week. Heavy manufacturing and steel names traded lower, with this movement accentuated by a note from Moody's maintaining its negative outlook on the sector. Equities maintained their negative trend through 3:00amEST and 4:00amEST. Bullish comments on the UK's economic outlook released from the BoE' minutes served to set a bottom to equity declines, but into 5:00amEST, European bourses remained to the downside. In light trading, markets held their levels a -0.40% to -0.80% ahead of another NY morning packed with key earnings in the financial, pharma, industrial and airline sector.

- In individual equities: The CEO of VW's [VOW.GE] Audi unit said the global market for luxury cars woul bottom out in 2009 and see sales slightly increase in 2010. Interestingly Lamborghini has seen some signs of a recovery. TomTom [TOM2.NV] reported a Q2 Net of €21M v €18.9Me and revenue of €368M v €335Me. Cash flows were €96M, and demand in both the European and North American PND markets has developed in line with the company's expectations so far this year. BHP Biliton [BHP.AU] said its Q4 iron ore production was -10% y/y to 27.1M tons while copper production was -21% y/y to 307.2K tons. Uranium production was +12% y/y to 1,154 tons and aluminum output was +2% y/y to 310K tons. Siemens [SIE.GE] may be considering additional job cuts to meet FY09 targets. Additional cuts are seen as needed on top of shortened working hours in attempts to meet the goal of beating 2008 earnings results. Allianz's [ALV.GE] CEO said 1,000 fewer employee cuts would be made than had been initially planned, although he expects insurance operations to continue to be challenging in 2010. WSJ's "Heard on the Street" said Hermes' [RMS.FR] strong H1 results are not a buy signal for broader luxury retailer sector, attributing the strong performance to leather goods, as fashion sensitive designs of those products do not change often. Deutsche Telecom's [DTE.GE] O2 said it might be interested in purchasing Telefonica's
UK mobile phone operations, according to FT Deutscheland. Praktiker [PRA.GE] reported a Q2 Net €34.6M v €32Me and revenue €1.1B v €1.1Be. Software AG [SOW.GE] reported a Q2 net of €28.9M v €29.4Me, revenue of €176.4M v €177Me and EBIT of €44.2M +8% y/y. The company said its FY09 guidance will needed to be adjusted following IDS purchase. Lonza Group [LONN.SZ] reported a H1 net profit of CHF118M v CHF125Me, EBIT CHF136M v CHF170.4Me, Rev CHF1.33B v CHF1.38Be. Lonza says the majority of markets remain resilient. NorskHydro [NHY.NO] Reports Q2 Net Loss NOK619M (ex items) v Loss NOK791Me , Rev NOK17.1B v NOK14.2Be. Aluminum demand apparently flattened out at low level after historic drop; prices expected to remain low following a small pickup. Key end markets of construction and transport remain weak. Cautious outlook for demand , Global Aluminum consumption to decline 15% to 20%. Positive effects from cost and capacity adjustments. Capacity curtailments of 460,000 tons a year completed. Iberdrola [IBE.SP] Reports H1 Net €1.51B v €1.5Be, EBITDA €3.43B v €3.5Be, Rev €13.1B v €13.5Be. Targeting year end debt levels at €25-26B.

- In speakers: the WTO's Lamy commented that there were some slowing of the contraction in global trade. He noted that the response of governments around the world would play a big part in determining the magnitude of this decline and its duration. Trade rose 2% in real or volume terms in 2008 compared to rising 6% in 2007. In the
UK, the BoE's Bean reiterated his position that there are some indications of a bottom in economic activity but added that there are few signs a recovery was taking hold. BoJ's Dep Gov Yamaguchi made additional comments noting that the BoJ did not see need for further monetary easing and that the risk of Japan entering deflationary spiral was small. Ireland's Debt Chief Whelan said he has not ruled out selling more bonds in 2009 to plug 2010 budget if demand remained but did not have immediate plans to pre-refund bonds. The German Industrial Association noted that credit conditions would worsen over the next few months. The BoE's July monetary policy minutes stated there was not enough evidence to support increase in £125B APF program and said the bank would reassess APF in light of August forecasts. The near-term CPI outlook might be higher with the decline in GBP currency one factor behind higher than expected inflation. The BOE noted that surveys suggested faster than expected GDP momentum and that downside risks probably diminished. BOE Agent benks noted that recovery in housing markets continued and that consumer spending had stabilized. However, it did note that many companies expect further job cuts.

- In currencies: Consolidation was the theme throughout the European morning for the EUR/USD pair as option expiration chatter subduing price action. Dealers noted that option related selling due to a good size 1.4200 European Digital which expires later today at the NY. cut (
14:00 GMT). Also talk of a €1.0B in 1.4200 plain vanilla strike also in play. The writer of the European Digital option will look to keep spot below 1.4200 to avoid a payout; The 1.4200 plain vanilla strike would contribute to the delta-related demand on dips, hence the tight range seen thus far.

- The GBP retraced earlier session losses following the release of the BOE minutes from the July 9th policy decision. The comment that the BOE thought that near-term downside risks to GDP had diminished helped push the GBP/USD off session lows of 1.6311 to test 1.6370 area.

- In Energy/commodities:
China might cut retail fuel prices at the end of July according to the China Daily newspaper. The price reduction would be in line with the recent drop in international crude oil prices.|| China June iron ore imports came in at 55.3M tons versus 53.5M tons m/m . India targeted FY11/12 Coal production of 520.5M tons compared to 120M tons in FY09/10. It noted that Coal demand was estimated at 731M tons in 2011/12 period. NYMEX Sept Crude futures off around $1 at $64.61 in its electronic session ahead of the NY morning. Spot Gold down $2/50/oz to $945.60

- In Fixed Income Supply: Government bonds have been unable to capitalize on a bout of profit taking in equities this morning in
Europe. Gilts have been under pressure for the second successive session following a hint of bullishness in minutes from the BoE's July policy meeting. The market was almost universally expecting a £25B increase to the BoE's asset purchase program earlier this month but was spectacularly wrong footed with MPC members unanimously deciding to keep both rates and QE on hold. No hints of an increase to QE were forthcoming and the BoE noted that both GDP and CPI data could increase faster than it had previously anticipated. Gilts subsequently sold off across the curve where bear steepening has ensued. The 10y Gilt approaching its cheapest levels relative to both 10y Bunds and UST's since the beginning of the month, with yield spreads of 46bps and 33bps respectively. The yield on the 10y Note has moved back above the 3.50% level , with the Bund yielding 3.38% in current trade.

- Credit Crisis: Moody's notes it has a negative outlook for Spanish regions for 2009 and 2010 due to increasing budget pressures stemming from decreasing tax revenues

- In the papers: A London Telegraph article noted that Barclays and RBS might need to find billions of pounds more in capital if they are to continue growing their investment banks under new rules . According to JP Morgan analyst, Barclays would need to find another £12.8B and RBS £8.5B to meet new capital rules under a reformed regulatory regime while HSBC has a £3B capital shortfall.- Officials hope to implement the regulatory changes from the end of 2010, though the date may be delayed if the economy was not in recovery. The FT wrote that
China is planning to deploy its foreign reserves to encourage overseas expansion and acquisitions by Chinese companies. Report states that Wen's comments on "going out" mark the first official articulation of the policy and implies reserve diversification in a broader sense. Report mentions companies such as Petro China, China Telecom, Chinalco and Bank of China as firms likely to be supported.

*** NOTES ***

- China said it hopes the Fed's balance sheet will improve and stated that next week's Sino-US talks to focus on boosting economic growth.
China hopes the US will conduct monetary and fiscal policy responsibly and hopes its US Treasury's are "appropriately profitable." It said its economy improving, stable CNY is a plus for the global economy, export outlook depends on global economy, pace of decline in exports could ease in H2.

- China exports expected to fall about 20% y/y in 2009 as decline in overseas demand is not abating - China Securities Journal

- China oil demand +1.8% y/y, 3rd monthly rise in a row.

- US wants trade policy in interests of US people.

- Telegraph: Barclays and RBS will need billions more in capital. What a difference 6 months makes...

- (
UK) NIESR: UK's house-price slump will persist until 2012 and hurt consumer spending

- Swan: Inflation likely to remain subdued.

- John Key: NZ coming out of recession but unemployment will keep rising.

***Looking Ahead***The comments come ahead next week's China-U.S. Strategic and Economic Dialogue.

- Before the bell earnings:

- 7:00 (US) MBA Mortgage Applications w/e Jul 17th: No expectations v 4.3% prior

- 8:30 (CA) Canadian May Retail Sales M/M: 0.50% e v -0.80% prior

- 8:30 (CA) Canadian May Retail Sales Less Autos M/M: 0.5%e v -0.5% prior

- 10:00 (US) May House Price Index M/M: -0.2%e v -0.1% prior

- 10:00 (US) Fed Chairman Bernanke's testimony before Senate Banking Committee

- 10:30am DoE Crude Oil/Gasoline/Distillate Inventories

- 15:30 (MX) Mexican Unemployment Rate 5.65% e v 5.31% prior

- (BZ) Brazil SELIC Target Rate: 50bps cut to 8.75% expected ( current rate is 9.25%)


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