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Forex Blog - European Market Update: German IFO exceeds expectations; UK GDP disappoints...again

Today 05:47am EST/09:47am GMT

European Market Update: German IFO exceeds expectations; UK GDP disappoints...again



- (GE) German May Real Construction orders NSA Y/Y: -4.6% - Stats Office

- (FR) French Jul Consumer Confidence: -39 v -36e

- (HU) Hungary May Retail Trade Y/Y: -4.2% v -4.2%e

- (FR) French Jul Preliminary PMI Manufacturing: 47.9 v 46.5e; PMI Services: 45.5 v 47.7e

- (GE) German July Advance PMI Manufacturing: 45.2v 42.0e; PMI Services: 48.4v 46.0e; both at 10 month highs

- (EU) Euro-Zone Jul Advance PMI Manufacturing: 46.0 v 43.5e; PMI Services: 45.6 v 45.2e; Composite: 46.8 v 45.3e

- (GE) German July IFO Business Climate: 87.3 v 86.5e; Current Assessment: 84.3 v 82.9e; Expectations Survey: 90.4 v 90.1e

- (UK) Q2 Advance GDP Q/Q: -0.8% v -0.3%e; Y/Y: -5.6% v -5.2%e

- (UK) May Index of Services Q/Q: -1.0% v -0.8%e


- In equities news overnight : European equity markets took their opening note from a markedly changed earnings sentiment in the NY post-market and European pre-market. Despite Asian equity strength (seen as reaction to strong Samsung/Hynix earnings and Korean Q2), disappointing US corporate earnings from tech giant Microsoft [MSFT] and Amazon [AMZN] continued what has recently been seen as a pronounced negative turn in Q2 reports. In the European pre-market, Merck [MRK.GE], Syngenta [SYNN.SZ], Ericsson [ERICB.SW] and Danone [BN.FR] all missed their analyst estimates; misses were significant for Ericsson and Merck. A notable standout, however, was Vodafone [VOD.UK] that meet its expectation and reaffirmed FY targets. Equities posted sharp declines just past the open and negative sentiment seemed pervasive. This attitude was erased following statement from the ECB's Orphanides regarding recovery timelines and anticipation ahead of German July PMI's. Those German PMI's, coming out at 3:28EST showed further recovery and read ahead of expectations, despite this, in a case of buy the rumor, sell the news, equities paired their retracement before rallying once again ahead of IFO and EU data sets at 4:00ESt. In this whipsaw trading, sector performance remained mixed with downside: autos (Euro June commercial vehicle sales), technology (Microsoft) and retail (Carrefour expansion plans [CA.FR]) leading lagers; industrials (German steel names) were outperformers to the up side. Equities again varied widely in their movements ahead of the 4:00EST release of the IFO, that figure, much like the PMI came in ahead of expectations, but equities looked ready to sell on the news. IFO's Abberger statement following the release that the German economy was to exit recession in Q3 shot equities through the unchanged mark, and for the case of the DAX and FTSE to new 2009 highs. Markets paired some of these gains following the 4:30EST release of the
UK's advanced Q2 GDP figure, but with low expectations for the number, declines were moderated. Bourses held their positive levels into 5:30EST as traders once again looked to US corporate earnings releases set for the NY morning. On the back of heavy earnings releases and significant data flows, European trading volumes have broken a multi-weak trend finally positing good volumes on all major exchanges. CAC, DAX and FTSE volumes all showed improvements for approx 50% ahead of their depressed summer averages.

-In European equities: Ericsson [ERICB.SW] Reports Q2 Net SEK800M v SEK1.6Be, Rev SEK52.1B v SEK53.3Be. Q2 Gross Margin 36.3% v 35.7%e. Q2 Networks sales SEK34.7% v SEK33.5B q/q. Q2 Professional Services sales SEK14.1B v SEK12.8B q/q. || Merck [MRK.GE] Reports Q2 Net profit €108.5M v €128Me, Op profit €184.5M v €210Me, Rev €1.9B v €1.9Be. Q2 Liquid crystals revenue €189M, -21% y/y. Q2 Erbitux revenue €171M, +18% y/y. Q2 Rebif revenue €387M, +21% y/y. Reaffirms FY09 outlook; still sees revenue growth of up to 5%. Sees FY09 liquid crystals revenue 20% to 25% y/y. || Vodafone [VOD.UK] Provides interim statement: Reports Q1 Rev £10.7B v £10.8Be. Reaffirms FY09 Outlook: The Group is trading in line with management's outlook issued in May 2009 for the current financial year. In a challenging economic environment free cash flow generation has been strong, enabling continued investment in the Group's growth areas including mobile data, fixed broadband and
India. || Syngenta [SYNN.SZ] Reports H1 Rev Net $1.39 v $1.51Be, Rev $6.65B v $7.0Be. CEO: For the full year, achieving earnings growth has become more challenging. However, in the second half currency and raw material trends are more favorable and, assuming current supportive conditions in Latin America continue, we are targeting full year earnings per share** close to the record level achieved in 2008. Q2 seed sales $622M v $612M y/y, Q2 crop sales $2.42B v $2.88B y/y. || Saab [SAABB.SW] Reports 1H Net265M, Rev SEK11.7B v SEK10.8Be; Raises FY09 sales forecast from prior flat levels. Order backlog at SEK42.2B, bookings at SEK8.1B. || United Utilities [UU.UK] Provides trading update: Had successful year, proposes final dividend of 22.03p/shr. || National Express [NEX.UK] Cosmen family has joined with CVC in bid for company -FT. Spanish based Cosmen family is the largest shareholder in the group. Cosmen/CVC looking to acquire group and then rollover its current debt load of £1.2B through its existing creditors. || BP [BP.UK] China Business News reiterates company is in talks to build large refinery in China with PetroChina and Sinopec. Reminder: on 7/21 China Business News speculated about BP holding talks about large refinery without naming potential partners. || Areva [CEI.FR] Update: Alstom and Schneider say they are considering a joint bid for Areva's T&D distribution unit. If this offer is accepted, would ultimately transfer the transmission activities to Alstom and the distribution activities to Schneider Electric. Such a transfer of activities would have no social consequences. || Air France [AF.FR] Reports Q1 Rev €5.19B v €5.53Be (-20.5% y/y). Reiterates FY forecast; expect slight improvement in 2H. Expects to see more limited deterioration of market conditions in back half of 2009. Q1 passenger revenue down 18.7%, cargo revenue down 41.5%. || Danone [BN.FR] Reports H1 Net profit €722M v €706Me, EBIT €1.21B v €1.19Be, Rev €7.52B v €7.57Be. Confirms 2009 sales, op margin guidance. Q2 dairy volumes +2.7%. Q2 dairy prices -2%. || Q-Cells [QCE.GE] Forms JV with MEMC for the construction of 50 MW solar park in Bavaria. Co's formed a joint venture to construct large solar parks, in which each partner will have a 50% share. The first shared project will be a facility in Strasskirchen, Bavaria. With a total capacity of around 50 MWp, this will be the largest ground mounted PV system in Germany to be operated using crystalline solar cell technology. Q-Cells International, a 100%-owned subsidiary of Q-Cells SE, has been commissioned to construct the facility. || Porsche [PAH3.GE] Follow up: Review of on-going VW/Qatar/Merger operations. Wendelin Weideking has been removed as CEO, to be replaced by Michael Macht who will now be CEO of 'sports car' unit. Porsche has provided go ahead for Qatar investment after approving plans for a €5B capital raise. VW has agreed to concept of integrated company with '10 brands' that includes a Qatar investment. Qatar to have 17% stake in VW and nearly 20% of voting rights in firm after acquiring option contracts held by Porsche. || USG People [USG.NV] Reports Q2 Net profit €1M v loss €1.3Me, EBITA €12M v €16.8Me, Rev €722M v €745.5Me. CEO: Have seen some signs of sabilization in declines over the past few months. Recovery is clearly not yet here however. See stabilization in decline of orders. Net debt €485M. ||

- Speakers: ECB's Orphanides commented that a serious recession continues but saw signs of recent improvement. He noted that both fiscal and monetary measures taken to deal with situation have started to yield some results ||Canadian Trade Min Day stated that a rising CAD was affecting exports ; Not concerned about currency level. He mirrored the BOC report that
Canada was moving closer to positive growth || IFO's Abberger commented that the recession in Germany to end in Q3 but cautioned that any recovery was not expected to automatic. German companies were on firmer ground and that pessimism was easing. However, the official noted that risks remained for German economy especially in labor and lending areas. Problems of lending by companies would tend to become more difficult in H2. lastly he suggested that the ECB keep key interest rates unchanged || IFO's Nerb commented that the German economy was gaining traction with positive sentiment coming from manufacturing sector. However, he declined to revise forecasts at the moment. German GDP might come close to zero line as the German stimulus programs showed impact. Lastly he noted that German firms still have trouble obtaining credit || Japan Regulator extends short selling ban until Oct 31st || French regulator AMF to extend short covering rules until Jan 31st, 2010 || China PBoC reiterated that it would stick to an 'accommodative' monetary policy. - Monetary tools will be used to guide both growth of credit. It also reiterated that its economic recovery was not yet on fully stable footing || Treasury's Byrne commented that he was cautious but confident that economic growth would return by the end of the year. The UK Q2 GDP data reflected the scale of the international slowdown, but also signs of easing in down movement

- In Currencies: The USD price action was mixed during the European morning as data highlighted some divergences between the
UK and continental Europe economic prospects.

- GBP was softer in the session as domestic economic fundamentals remained fragile and continued headwinds remain on the growth front following the worse-than-expected Q2 GDP data. GBP/USD dipped to 1.6430 from 1.6520 following the GDP data. EUR/GBP higher by 65 pips at 0.8640 area.

- Overall the USD saw its earlier gains in
Asia erode as risk appetite regained its legs despite earnings disappointment form Microsoft and American Express. The Euro-Zone PMI and German IFO data helped to ease concerns for the time being. EUR/USD tested 1.4227 during the morning after probing the 1.4140 area in Asia. The euro was entering the NY morning just above the 1.42 handle. Dealers noting that a weekly close above 1.4050 would enhance the probability the 1.44 or even 1.46 could be tested soon.

- The CAD was firmer in the session. Canadian Trade Min Day comented during his
Singapore visit that although a rising CAD hurts exports, he was not concerned about currency level at this time. He reiterated the BOC view that the Canadian economy was moving closer to positive growth

- In Energy/commodities: British Petroleum [BP.UK] China Business News reiterated recent reports that the company was in talks to build large refinery in
China with PetroChina and Sinopec cited as potential partners. || Reportedly, a Russian minister stated that the country might ease foreign access to its natural resources ||

- In Fixed Income Supply: European debt futures have reversed their earlier gains as better than expected data continued to stream out of the Eurozone throughout the session. Both 10-year Gilts and Bunds hit their highest yields in 5 weeks as recovery hopes continue to gain.

*** NOTES ***

- As the NY morning approaches, the question is whether the risk appetite is falling out of favor

- European Manufacturing PMI data beats estimates across the board, Services mainly better (expect for France)

- UK GDP comes in below expectations delaying recovery hopes; YoY decline was highest since records began in 1955

- US futures overcome the disappointment of Amex and MSFT earnings aided by German IFO data

- Asian economic data mixed: Singapore June Indus Output -9.2% m/m; South Korea Q2 GDP came in with its biggest increase since Q4 of 2003

***Looking Ahead***

Highlights: University of Michigan Survey due. Geithner, Bair and Bernanke to testify on financial regulation

- 8:00 (BR) Brazil Jul IBGE CPI IPCA-15 M/M: 0.4% expected versus 0.4% prior

- 10:00 (US) July Final University of Michigan Confidence: 65.0 expected versus 64.6 prior

- (MX) Mexico May Retail sales: -6.2% expected versus -5.8% prior

- (CO) Colombia Central bank Interest rate Decision: No change expected in its Overnight rate of 4.50%


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