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Forex Blog - European Market Update: risk assumption frame of mind weighs upon USD sentiment

Today 05:53am EST/09:53am GMT

European Market Update: risk assumption frame of mind weighs upon USD sentiment



- (IN) India Central Bank (RBI) left its key interest rates unchanged as expected. Repo at 4.75%, Reverse Repo at 3.25% and Cash Reserve Ratio at 5.00%

- (FI) Finland Retail Sales Volume Y/Y: -0.9% v -5.3% prior

- (SZ) Swiss June UBS Consumption Indicator: 0.963 v 0.748 prior

- (FR) French July Jul Business Survey Overall Demand: -43 v -58 prior

- (KS) Bank of Korea Releases Rate Meeting Minutes: Voted unanimous to hold interest rate steady at 2.0% in June

- (SP) Spain May Mortgages on Houses Y/Y: % v -41.9% prior

- (SP) Spain May Mortgages-capital loaned Y/Y: % v -41.3% prior

- (SW) Swedish June PPI M/M: -0.8% v 0.1%e; Y/Y: 1.1% v 2.0%e

- (SW) Swedish June Retail Sales M/M: -0.4% v -0.3%e; Y/Y: 2.2% v 2.0%e

- (NV) Netherlands Jul Producer Confidence: -14.8v -12.8e

- (IT) Italian Jul Consumer Confidence: 107.5 v 105.8e, highest since Nov 2007

- (LI) Lithuania Q2 Prelim GDP (constant prices) Y/Y: -22.4% v -17.7%e

- (SA) South African Q2 Unemployment: 23.6% v 24.2%e

- (UK) U.K. CBI July Distributive Trades: -15 v -17 prior


- Equity markets in Europe have continued their torrential upward rise. In the thick of earnings season, outside of last Friday's mixed close (with the CAC slightly negative), equity markets have climbed higher for 11 sessions. In the European pre-market, Q2/H1 reports were seen from giants in the financial, energy and industrial sector. BP [BP.UK] beat on net profit and revenue, while posting a q/q production increase (it is assumed that main European rival Shell [RDSA.UK] will post a decline on Nigerian attacks. Deutsche Bank [DBK.GE] also posted its second straight quarterly gain, with figures ahead of expectations on a turnaround in debt trading operations. Concerns around investor spying claims and continued RMBS exposure drove shares lower. EADS [EAD.FR], which missed on its net figure, confirmed expectations for approx flat y/y rev and Airbus deliveries, sending shares higher in the European morning. Equity strength followed these, and reports from Verbund [VER.AS], Ahold [AH.NV], BBVA [BBVA.SP] and Endesa [ELE.SP] drove equity movements. European bourses trended higher through the 3:00EST before peaking broadly before the 4:00EST hr. A range of cautious comments at this time from BP and the Norwegian central bank supported a sudden slackening in equity interest. Markets paired gains, with this trend accelerating past 4:30EST. By 5:00EST, markets were printing session lows with the FTSE falling into negative territory before rallying. Volumes through the morning session have remained strong on the back of high churn in earnings related names that pushed averages ahead of their norms. With another full NY morning with additional Q2 corporate earnings and
US consumer confidence and home price index data expected, European equities are again seeking to position themselves ahead of these releases.

- In individual equities: Deutsche Bank [DBK.GE] Reported Q2 Net €1.09B versus €1.0B estimates, revenue €7.94B above the €7.2B consensus. Tier 1 Ratio 11% v 10.2% q/q. Q2 RoE 12.8% v 22.26% q/q. Q2 Level 3 assets €64B v.€80B q/q. Q2 provision for loan losses were €659M v €526M q/q. Q2 provision for credit losses €1B v €135M y/y. The bank provided no concrete outlook for the remainder of 2009. CEO said the outlook for the remainder of 2009 is strongly influenced by progress in the global economy. BP [BP.UK] reported a Q2 net profit of $4.4B, well ahead of the $2.8B estimate. Revenue was $56.6B, above the $49.9B consensus. Q2 CAPEX $4.8B v $4.6B q/q, expects 2009 CAPEX to be less than $20B. Net debt at the end of the quarter was $27.1B The ratio of net debt to net debt plus equity was 22% compared with 20% a year ago. Reported production for the quarter was 4,005M boe/d, more than 4% higher than the second quarter of 2008. Replacement cost $3.14B v $2.39B q/q. CEO: latest economic data suggested the global economy could stabilise this summer but that any recovery, whenever it comes, would likely be sluggish. The overall picture is of energy demand now stabilising following significant falls in the first half of the year. We see little evidence of any growth in demand and expect the recovery to be long and drawn out. EAD's [EAD.FR] Reported Q2 Net €208M below €477M estimate, Q2 Rev €11.7B above €10.7B. Guided FY09 revenues in line with 2008 levels (implies €43.0B v €42.5Be). Expects positive EBIT in H2, but lower on y/y basis. Expects Airbus to win 300 gross new orders in 2009. 2009 Deliveries should be at least at the 2008 level. Negotiations on A400M with customers entering new phase/took Q2 charge of €71M on project. BBVA [BBVA.SP] Reported H1 Net €2.8B above €2.54B estimate, Net Interest Income €6.9B above €6.6B estimate. Q2 Net €1.56B beat €1.28B expectations, NPL Ratio 3.2% v v 2.8% q/q. Tier 1 capital ratio at 6.9% v 6.4% q/q. Lloyds [LLOY.UK] Appoints Sir Win Bischoff new Chairman. Sir Win will take up the position of Chairman of Lloyds Banking Group from
15 September 2009. Xstrata [XTA.UK] Provided H1 Production report: Thermal coal production +18% y/y. Ferrochrome production in the first half was 60% lower than the same period in 2008, following the temporary suspension of up to 80% of production capacity through late 2008 and early 2009.As the industry leader, the Xstrata-Merafe Chrome Venture acted swiftly to curtail production as demand for ferrochrome declined sharply from the third quarter of 2008 due to significant destocking in the stainless steel sector. Shire [SHP.UK] FDA Issued Complete Response Letter for INTUNIV Extended Release for the Treatment of ADHD in Children and Adolescents. Co has received a Complete Response letter today for INTUNIV(TM) (guanfacine) Extended Release from the Food and Drug Administration. This decision comes following labeling discussions with the FDA that did not result in agreement in time to meet the PDUFA date. Rolls Royce [RR.UK] To build 4 new factories and 2 new research facilities in UK and a wide chord fan blade factory in Singapore. These investments will enable Rolls-Royce to respond to anticipated growth in its aerospace and civil nuclear markets and will create or secure over 800 jobs in innovative high-value manufacturing programmes, largely in Assisted Areas. Investec [INVP.UK] Proposed equity placement of up to 22M shares (4.92% of current shares outstanding). The equity placement and subsequent repurchase of the debt is expected to improve Investec's tier 1 capital without reducing the total capital adequacy ratio, which is consistent with management's objective of maintaining capital levels significantly above regulatory requirements. Nexan [NEX.FR] Reported H1 Net loss €57M v profit €41.2Me (includes items), Rev €2.09B v €2.2Be. Guided 2009 Organic Rev down 10% To 15% y/y. Reaffirmed FY operation margin target of sales of 6%. LVMH [MC.FR] Reported 1H net profit €687M compared €734.4M estimate, Rev €7.8B in line with consensus of €7.8B. To pay interim €0.35 dividend. Expected to continue to gain market share. Cut costs by 5% in H1; To continue and amplify cost cuts in H2. To focus on Star brands. Pernod Richard [RI.FR] Sold Tia maria to Illva Saronno for €125M. Continental [CON.GE] Creditors to firm have urged management to halt plans for capital increase -Frankfuter Allgemeine Zeitung. Reminder on July 20 -Could seek to pursue a €1B capital increase (22% of market cap) - FT Deutschland. Lufthansa [LHA.GE] Could extend Austrian Airlines takeover past initial July 31 deadline -Agentur. Reminder: Firms have been in negotiations with EU Commission to seek regulatory approval for the action. Verbund [VER.AS] Reported H1 Net €242.9M versus €392.0M estimate, Rev €1.6B versus €1.67Be; Confirmed 2009 forecasts. H1 Operating results €533.7M v €564.2M y/y. H1 spot power market prices have fallen sharply. Reiterated it expects earnings for the full year to be on a par with 2008 levels. Subsea 7 [SUB.NO] Reports Q2 Net $82.2M v $47.9Me, Rev $637.2M v $560.1Me. Continues to see strong medium to long term outlook. Current operating environment remains challenging. Will continue to seek cost cuts across the group. Order book stands at $2.9B.

- In speakers: German Employers Assoc stated that H1 wage agreements were more moderate, with most below the 2.0% level. The Indian Central Bank (RBI) left its key interest rates unchanged, as expected. The RBI to maintain accommodative stance until demand recovers and noted it could reverse its expansionary policy quickly and effectively. The central bank raised its FY10 inflation forecast to 5% versus prior forecast of 4% and reiterated that 2009 GDP would grow by 6%. The RBI noted that both growth and inflation forecasts contained upside risks but added any upturn in growth momentum was unlikely until mid 2010. It reiterated its call for the Indian govt to curb fiscal deficit. Indian Fin Sec commented that the government would continue to be focused on growth and would continue accommodative monetary policy stance.
China's GDP to grow around 9% in Q3 - NDRC.

- In currencies: USD and JPY look likely to remain under pressure amid an ongoing backdrop of risk appetite in global markets. EUR/USD hit fresh 8-week highs as it briefly tested above the 1.43 level during the session. European dealers noting that a CNBC comment that with 184 of the S&P 500 companies that reported thus far 77% have surpassed analysts' estimates. Fanning the risk appetite was chatter that Merrill Lynch raised its China 2009 GDP forecast to 8.7% from 8.0% prior complemented with
China's Institute of Economic Research of the National Development and Reform seeing Q3 GDP at 9.0%. During Asia, RBA's Stevens was optimistic that the domestic downturn might not prove to be a serious one. AUD/USD hit fresh 10 month highs above the 0.83 handle while USD/CAD tested below the 1.0770 area. Thus risk assumption frame of mind continues to remain the prevalent trading theme.

- However, the JPY was entering the NY morning on a firmer note with option-related flows cited as one factor for the change in session sentiment. USD/JPY hovering in the mid-94 area after failing to sustain any momentum after testing 95.30 on Monday in NY. The USD/CHF pair inching lower towards the 1.0600 level and some dealers pondering whether the SNB might reappear to 'defend' the technical level.

- In energy/commodities: Saudi Aramco CEO commented in Al-Hayat that
Saudi Arabia has 4M bpd of spare capacity. Reportedly China to cut Diesel and Gasoline prices on Wednesday -State TV. France GDF Suez [GSZ.FR] Raising gas prices for French industry +7.4%, backdated to July 1st

- In fixed income supply: The competing themes of supply, equity weakness and month end have contributed to wild swings in fixed income this morning in
Europe. Government bonds recovered earlier losses to move firmly into positive territory ahead of 6am in New York. The first leg of the Treasury's record offering of coupon supply - a whopping $42B in 2 Notes - looms ominously and has seen short dated issues under perform. Bids moved into the belly of UK, German and US yield curves as equities rolled over, leading to bull flattening in all three markets. The Netherlands sold €1.1B in 2,3 and 9y DSL's whilst Italy sold €3.5B in 2011 zero coupon bonds, both with respectable results. Comments from PIMCO, noting that the UK Bank rate was likely to stay at its record low well into 2010 and that short dated Gilts looked cheap gained some attention but market reaction was ultimately muted.

- In the papers:
Britain's FSA has found no evidence that speculators are behind big swings in oil prices; U.S. CFTC plans to suggest a role of speculators in a WSJ article. The FSA was leaning toward the conclusion that recent volatility and price increases have more to do with uncertainty over economic growth than speculation, according to people familiar with the matter.

*** NOTES ***

- China's PBoC: Q2 domestic economic recovery faster than expected; Reiterates that the government should keep macroeconomic policy stable

- Could higher equity markets generate their own stimuli???

***Looking Ahead*** Massive U.S. 2-yr Auction today

- 9:00 (US) May S&P/CaseShiller Home Price Index: No expectations v 139.18 prior

- 9:00 (US) May S&P/CS Composite-20 Y/Y: -17.9%e v -18.12% prior

- 9:15 (US) Second Day of US/China Strategic and Economic dialogue

- 10:00 (US) Jul Consumer Confidence: 49e v 49.3 prior

- 10:00 (US) Jul Richmond Fed Manufacturing Index: 8e v 6 prior

- 13:00 (US) Treasury to sell $42B in 2y Notes


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