European Market Update

Daily Forex Fundamentals | Written by Trade The News | Aug 19 09 09:59 GMT |

China Shanghai Composite approaching bear market territory; BOE split vote on Asset Purchase Facility (APF )sends GBP lower and Gilt futures higher ECONOMIC DATA (GE) German Jul Producer Prices M/M: -1.5% v -0.2%e; Y/Y: -7.8% v -6.5%e; weakest annual reading since 1949 (JP) Japan Jul Final Machine Tool Orders Y/Y: -72.3 v -72.2% prior (HU) Hungarian Jun Avg Gross Wages Y/Y: 1.1% v 2.0%e (EU) Euro-Zone Current Account: -€0.3B v -€13.0B prior; Current Account Seasonal Adj: -€5.3B v -€1.2B prior (UK) Bank of England Minutes: MPC voted 6 to 3 to raise the Asset Purchase facility (APF) by £50B with the dissenters seeking a £75B increase (EU) Jun Construction Output SA M/M: -1.1% v -2.0% prior, Y/Y: -8.8% v -7.6% prior (SP) Spain Jun Trade Balance: -€3.2B v -€3.3B prior (UK) U.K. CBI August Industrial Trends Total Orders: v -59 prior SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM In equities news overnight: European markets again took their equity direction from volatile Asian markets. Losses in Asian bourses, specifically, later session declines in Mainland China drove further risk aversion tendencies that carried into the European morning. With the Shanghai exchange closing over 4% on the session, and nearly 20% from its early August peak of 3,477(and 2009 highs), European equities opened to the downside and quickly fell below the -1% mark. In another light earnings morning, figures seen out of Eurasian Natural Resources [ENRC.UK], Venture Petroleum [VPC.UK] and SBM Offshore [SBMO.NV] equities took their general trend from the technical and boarder risk aversion market tendencies. Comments from the BoE minutes at 4:30EST showed that the MPC was in unison on expanding its APF, the only dis-union being in the size expansion, further concerns that while the worst of the recession 'may' have passed, its effects are still being felt. Economic data releases have been light through the European morning and in this environment overall trading patterns and volumes have been thin. Turnover on the FTSE, CAC and DAX is seen down between 20-40% from its averages. In individual equities: Eurasian Natural Resources [ENRC.UK] Reports H1 Net $562M v $449Me, Rev $1.7B v $1.6Be. || Venture Production [VPC.UK] Reports H1 Pretax £105M v £103Me, Rev £275M v £262Me. H1 Production volumes up 16% to 52,988 boepd (2008 - 45,534 boepd). || National Grid [NG.UK] Announces results of scrip dividend issuance of new shares (approx 9% of shares outstanding). Confirms the issue and allotment of 24,691,249 ordinary shares on 19 August 2009 in relation to the operation of the Scrip Dividend Scheme for the 2008/09 final dividend, payable on 19 August 2009. || SBM Offshore [SBMO.NV] Reports H1 Net $95.5M v $98Me, Rev $1.4B v $1.4Be. Order Backlog $8.2B v $9.5By/y. Outlook: Management re-iterates that it expects net profit to be in the range of the 2008 level. Turnover is expected to be around US$ 2.9 billion. || Sanofi Aventis [SAN.FR] Reportedly US Patent Office has ordered re-examination of Plavix patent. Plavix is an anti-clotting drug from BMY and SNY. Multiple generic makers are working on their own versions of the drug. || Continental [CON.GE] Shaeffler states that a consortium of banks has granted it €12B in mid-term financing. Plan to change format of group structure to more capital market oriented group. Facility to have two tranches of 4.5 and 6 year maturities. Finance plan allows for potential merger of group with Continental. Fitch lowers long term issuer default rating; senior rating cut to B+ from BB. || Finmeccanica [FNC.IT] Has agreed to buy 88% stake in Pzl-Swidnik for $112M. Purchase to support Augusta helicopter unit. || Speakers: BOE minutes showed that the MPC voted 6 to 3 to raise the Asset Purchase facility (APF) by £50B with the dissenters (Gov King, Besley and Miles) seeking a £75B. The minority view was that not enough stimulus spending could have the CPI remain below 2% target. The minority also viewed that acting too cautiously towards monetary stimulus posed a larger danger than providing too much stimulus. The minority felt that if QE policy was too expansive, it could be reversed via asset sales and interest rate hikes. The majority view noted that a moderate QE increase of £50B was only needed as the immediate danger to downside GDP risk had diminished and that concerns that too cash might cause unwarranted increase in some asset prices. Overall, the MPC noted the promising signs that QE program was having but underlying M4 growth was surprisingly weak || ECB's Weber issued some cautious comments as he was not convinced that recovery was sustainable as the German economy was not yet able to stand on its own feet. Weber noted that the German economy would not reach 2008 GDP levels again until 2013. The current economic recovery was due to monetary policy and other government measures. Weber noted that the job market remained a negative factor and was too early to withdraw stimulus measures. Lastly the German would struggle for years to come as a result of the financial crisis ||Lativan Central Bank Head: Will continue to defend currency peg In Currencies: Ahead of the European morning the focus remained on the Shanghai index. The Chinese equity market approached 'bear market territory as its has decline by almost 20% decline since its Aug 4th high of 3,477, thus raising the risk aversion theme. The Shanghai Composite fell 4.3% in the session to close at 2,785. The USD and JPY again benefited from the rise in risk aversion. EUR/USD probing back below the 1.41 level but holding above the key hourly pivot point of 1.4050. USD/JPY approached the lower end of the 94 handle. The GBP was softer against its major pairs. Initially weakness was attributed to a Telegraph article that noted comments from UK opposition leader that the British Gov't could default on it debts (see 'in the paper section' below). GBP/USD declined from its opening levels in Asia of 1.6586 to test 1.6440 prior to the release of the BOE minutes from its August 6th policy meeting. The GBP exhibited another spat of weakness as the BoE Minutes revealed that three MPC members sought to raise the asset purchase target by £75B. The split vote on APF weakened GBP further (and supported Gilts futures). The GBP/USD dipped below the 1.6400 handle to test 1.6373 before consolidating its losses, while EUR/GBP firmed above the 0.86 level. The CAD and AUD currencies were softer as both energy and metals followed the Chinese markets. Oct NYMEX crude was off around 40 cents at $70.70/barrel. Natural Gas futures was hovering near $3/contract, which it has not traded below in the rolling front month contract since Feb 2002. USD/CAD continues to test the 1.11 neigborhood while AUD/USD dipped back below the 0.82 handle in the session. In Fixed Income: A confluence of factors has lead to a strong performance for Government Bond this morning in Europe. Gilt markets are particularly well bid following minutes from the BoE's August meeting, which somewhat surprisingly revealed that the MPC was split on its £50B expansion of quantitative easing. Markets had not excluded the possibility of a consensus vote however July's unexpected decision to stay put and the cautious tone of various BoE members in the lead up to August had led many to expect that any dissenters would be on the cautious side of the argument, But the BoE continues to confound and Gilt markets are better for it, with the short end in particular subject to good buying. The 2-year Gilt has moved back below 0.90%,the 10-year Gilt has moved below 3.60%, and UK 2s10s spread has pushed though +270bps . Bunds and Treasuries are benefiting from risk aversion stemming ultimately from continued weakness in Shanghai equities. The yield on the 2-year Note has fallen back below 1%, whilst the yield on the 10y note has plunged into its lowest levels after its initial offering last week at the 3.43% area. The yield on the 10y Bund is off by 3bps at 3.268% In Energy: Kuwait Oil Min stated that OPEC should hold current production levels at next energy meeting. Current crude prices were 'not bad' with a good margin in the $70-80/bbl rang. The official was optimistic regarding demand increase by the end of 2009 || According to the China Petroleum and Chemical Industry, China's domestic oil-product sales dropped "significantly" in July on weak demand . Also, in July commercial fuel stockpiles rose by a big margin. || Japan Aug 15 crude stocks at 15.5M kiloliters versus 15.1M prior. Gasoline at 1.9M kiloliters compared to 2.1M prior In the papers: Telegraph: UK Opposition leader David Cameron warned that spending could lead to Britain defaulting on its debt as current debt levels now posed unjustified economic risks. Cameron stated that the UK could "get to a level of government debt where, not that it becomes certain that people will cease to lend you the money, but you start running risks of them demanding higher premium, higher interest rates or run the risk of not being able to meet its obligations." The article noted that UK borrowing was predicted to be far higher in 2009 and 2010 than it was when Britain was forced to apply to the International Monetary Fund for a loan in 1976 NOTES China's Shanghai Composite has decline almost 20% from its Aug 4th high of 3,477 Pimco believes that USD to fall as it loses reserve status Telegraph: British Gov't could default on it debts - Opposition leader BOE splits on the Asset Purchase Facility (APF) between £50B and £75B increase ECB's Weber: Not convinced that economic recovery is sustainable Current sentiment seems concerned that global consumer demand not strong enough to replace government stimulus programs Looking Ahead Canada Inflation, US, DOE weekly energy inventories. 7:00 (US) MBA Mortgage Applications: No expectations v -3.5% prior 7:00 (CA) Canadian Jul Consumer Price Index M/M: -0.2%e v 0.3% prior, Y/Y: -0.8%e v -0.3% prior 7:00 (CA) Canadian Bank Canada CPI Core M/M 0.1%e v 0.0% prior, Y/Y: 1.9%e v 1.9% prior 8:00 (PD) Poland Jul Producer Prices M/M: -0.2%e v 0.6% prior, Y/Y: 3.8%e v 4.0% prior 8:00 (PD) Poland Jul Sold Industrial Output M/M: -1.40% e v 6.20% prior, Y/Y: -2.9%e v -4.3% prior 8:30 (CA) Canadian Leading Indicators M/M: 0.2%e v -0.1% prior Trade The News Staff Trade The News, Inc. 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