European Market Update: UK CPI comes in above expectations; European periphery Bill auctions go off without any hitches

***Economic Data***
– (FI) Finland Apr PPI M/M: 0.1% v 1.1% prior; Y/Y: 7.3% v 7.8% prior
– (JP) Japan Apr Final Machine Tool Orders Y/Y: 32.3% v 32.3% prior
– (EU) Euro Zone Apr EU 25 New Car Registrations: -4.1% v -5.0% prior
– (SW) Sweden Q1 Total Number of Employees Y/Y: 2.8% v 1.6% prior
– (SW) Sweden Apr Average House Prices (SEK): 2.035M v 2.057M prior
– (SA) South Africa Apr CPI (all items) M/M: 0.3% v 0.5%e; Y/Y: 4.2% v 4.4%e
– (UK) Mar DCLG UK House Prices Y/Y: 0.9% v 0.7% prior
– (UK) Apr CPI M/M: 1.0% v 0.7%e; Y/Y: 4.5% v 4.1%e; Core CPI Y/Y: 3.7% v 3.2%e
– (UK) Apr RPI M/M: 0.8% v 0.8%e; Y/Y: 5.2% v 5.2%e; RPIX Y/Y: 5.3% v 5.3%e; Retail Price Index: 234.4 v 234.8e
– (GE) Germany May Zew Economic Sentiment: 3.1 v 4.5e; Current Situation: 91.5 v 87.5e ((highest reading on record)
– (EU) Euro Zone May Zew Economic Sentiment: 13.6 v 17.3e

Fixed Income
– (SP) Spain Debt Agency (Tesoro) sold approx €4.47B vs. €4.5-5.5B indicated range in 12-Month and 18-month Bills
– Sold €4.27B in 12-month Bills; Avg Yield 2.546% v 2.77% prior; Bid-to-cover: 2.50x v 1.63x prior; Max Yield 2.568%
– Sold €1.20B in 18-month Bills; Avg Yield 3.095% v 3.364% prior; Bid-to-cover: 4.10x v 2.04x prior; Max Yield 3.129%
– (GR) Greece Debt Agency (PDMA) sold €1.625B vs. €1.25B indicated in 13-week bills; Avg Yield 4.06% v 4.10% prior; Bid-to-cover: 3.30x v 3.45x prior
– (SA) South Africa sold total lZAR2.1B vs. ZAR2.1B Indicated in 2021 and 2036 Bonds
– (EU) ECB allotted €119.4B vs. €119Be in 7-Day Main Refinancing Tender
– (HU) Hungary Debt Agency (AKK) sold HUF50B in 3-Month Bills; Avg Yield 5.91% v 5.92% prior
– (BE) Belgium Debt Agency sold approx €2.41B vs. €2.0-2.5B indicated in 3-month and 12-month Bills
– Sold €702M in 3-month Bills; Avg Yield 1.131% v 1.198% prior; Bid-to-cover:4.81 x v 3.38x prior
– Sold €1.712B in 12-month Bills; Avg Yield 1.672% v 1.669% prior; Bid-to-cover: 2.30x v 2.69x prior

*** SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM ***
***Notes/Observations:
– RBA Minutes: Higher rates needed in Australia at some future point
– Italian PM Berlusconi ‘s party performed poorly in local elections
– Dealers taking note of possible ‘canaries’ in various emerging markets, commodities and banking sector indexes
– Spain and Greece successfully sell short-term paper
– UK CPI comes in above expectations:
– German ZEW surveys is cautious on additional growth momentum

Equities:
FTSE 100 +0.15% at 5932, DAX -0.50% at 7352, IBEX 35 +0.40% at 10403, CAC 40 +0.20% at 3997, FTSE MIB +0.40% at 21771, SMI -0.20% at 6552

– European shares were trading lower on continued sovereign debt concerns and an orphan IMF after the arrest of DSK in NY this weekend. An agreement over Portugal’s bailout, widely anticipated, did not push up the shares while nervousness over Greece’s fate has added to market volatility and depressed shares further. EU officials are increasing pressure on Greece to start selling assets and implementing deeper cuts. EU’s Juncker used the word ‘reprofiling’ of Greece’s debt which implies holding talks with bondholders to agree extending Greece’s debt-repayment schedule. It seems that ‘reprofiling’ would come after asset sales and more austere measures but before ‘restructuring’. France’s Lagarde and Belgium’s Reynders opposed the idea proposed by Juncker further strengthening the impression that with or without DSK, the division in the European Union is significant.
– Banks were pressured the most by the debt crisis and traded lower across the board. Meanwhile Carrefour [CA.FR] rallied after reaffirming its FY11 guidance. BMW [BMW.GE] and Daimler [DAI.GE] also fell during the session after European car registration showed a decline of 4.1%. In M&A news, Publicis [PUB.FR] announced it would acquire Rosetta Marketing group and the transaction would improve the margins. BP [BP.UK] and Rosneft talks on the share swap agreement collapsed, blocked by TNK-BP which noted that the swap would violate the shareholders’ agreement with BP. However, the latter issued a statement that it would intensify its efforts to ensure TNK-BP’s continued success

Speakers:
– BoE Gov King commented that it was difficult to know when CPI would return to the 2.0% target and added that it was likely to rise further in coming months. He reiterated that views among MPC members are wider than usual. He expressed concern that there was a risk that high inflation might drive up inflationary expectations. He did note that economic activity levels remained weak and could help push CPI back below target. High CPI was mainly due to VAT increase, energy prices and import prices
– ECB’s Tumpel-Gugerell reiterated the iew that the ECB did not pre-commit on interest rate. She also added that Europe’s financial system had overcome crisis as fewer banks were reliant on ECB liquidity.
-Bundesbank Zeitler commented that most German banks were in better shape compared to last year but fell short in declaring victory from the financial crisis
– Spain Fin Min Salgado commented that she anticipated that Greece might require additional measures
– BoE’s designate member Broadbent commented that he would be uncertain how he would have voted at recent MPC meetings. The split in MPC vote indicated strong cases on both sides on the rate discussions. Commodity prices rises might have persistent effect on inflation. He also noted that monetary policy should and currently does respond to moves in asset prices. He might have concerns regarding high commodity price reading for inflation with persist
– China State Administration of Foreign Exchange (SAFE) Guan commented that the CNY currency float would help to contain one-way speculation and added that floating currency did not mean ‘one-way’ appreciation. He did note that China should enhance CNY currency flexibility and that the PBoC could regulate to prevent undo FX fluctuations
– German VCI Chemical Industry Association forecasts 2011 chemical production +5% y/y and sales seen rising 9% y/y, VCI noted that Q1 growth was exceptionally strong with chemical Sales +8.4% q/q
– Czech Central Bank’s Zamrazilova commented that real estate prices presented risks to banks and anticipated local real estate prices to decline slightly this year
– Libya Oil minister Ghanem had reportedly defected from Gadaffi’s gov’t

Currencies/Fixed income:
– Risk appetite improved ahead of the European morning but dealers were initially taking note of some potential ‘canaries’ in the mine shaft. Key emerging markets (like Brazil Bovespa) tested its 2011 lows, Key psychological levels in oil and copper of $100 and $4.00 remained vulnerable with lacking momentum on the upside. The banking sector appeared vulnerable. However a strong Spanish auction results helped to temper any risk aversions sentiment for now
– The euro-area debt outlook remained unresolved after yesterday’s euro group meeting, where an agreement on Greece was still expected to take several more weeks. But the EUR/USD maintained a firm tone all morning with market talk of an Asian central bank reappearing as buyers in the pair. The EUR/USD also benefited from hotter inflation data out of the UK. The pair was hovering around the 1.42 level as the NY morning approached and was about 20+ pips off its morning highs.
– The GBP/USD tested the 1.63 handle after its Apr CPI data came in above expectations. Dealers will now look fprward to tomorrow’s release of the minutes from the most recent BOE decision.
– The JPY was softer among the major pairs with M&A flows cited as one rational. Market p[participants appeared to be front running large M&A related yen outflow after the recent Takeda deal and the latest Toshiba deal announced in the Japanese financial press.

Political/ In the Papers:
– The Italian coalition suffered from local elections losses including the heavily campaigned city of Milan. The centre-right coalition won approximately 40% of the votes in Milan, trailing the centre-left opposition by a record seven points. This was the first time in two decades that the centre-right had failed to get more than half the votes; this will now go to a run-off at the end of the month. Initial results indicated the centre-right coalition had also lost in at least another 14 cities in northern Italy. The Prime Minister suggested he may stand down in the 2013 elections. Note the result in Milan was seen as crucial to his decision.
– Reports in the London Telegraph looked at the ways the US can avoid a debt default if the debt ceiling is not raised. Options for the government include suspending sales various government series securities, utilizing the exchange stabilization fund, increasing the issuance of cash management bills, and swap federal financing bank debt and engaging in asset sales. Similarly in the London Telegraph, it was noted that the US Treasury had suspended payments into a civil service pension fund in a move that could free up about $150 billion, as Congress continues to debate whether to raise the debt ceiling.

***Looking Ahead***
– (BR) Chinese Commerce Minister Chen Deming visits Brazil
– 6:00 (EU) WTO’s Lamy speaks at Brussels Development Conference
– 7:00 (EU) ECB to drain €76.0B in next 7-day Term Deposit Facility
– 7:00 (SA) South Africa Mar Retail Sales Constant M/M: 0.5%e v -1.0% prior; Y/Y: 5.7%e v 5.6% prior
– 7:45 (US) ICSC Weekly Chain Store Sales
– 8:30 (CA) Canada Mar Int’l Securities Transactions: C$5.0Be v C$2.5B prior
– 8:30 (US) Apr Housing Starts: 569Ke v 549K prior; Building Permits: 590Ke v 585K (revised from 594K)
– 8:55 (US) Weekly Redbook Retail sales
– 9:15 (US) Apr Industrial Production: 0.4%e v 0.8% prior; Capacity Utilization: 77.6%e v 77.4% prior
– 10:00 – (BR) Brazil Apr Caged Formal Job Creation: K v 92.7K prior
– 11:00 (US) Fed to purchase $5-7B in Notes/Bonds
– 11:30 (US) Treasury to Sell 4-Week Bills
– 16:30 (US) Weekly API Energy Inventories
– 17:00 (CO) Colombia Mar Trade Balance: $150.0Me v $362.6M prior

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May 16th, 2011 in Forex News

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