European Market Update

- The European indices are currently trading in negative territory in the session led down by energy companies as oil prices have continued to trade lower over the past few days. Some equity analysts indicating that sentiment towards the energy sector will be cautious over the next few weeks.
- The yield on the 10-year Bund opened above 4.00%, but has moved off of earlier highs. European Government Bonds are currently trading in positive territory in the session, but are off of earlier highs. The March Euro-Bund contract traded below the 155.75 level for the first time since August of 2006, but has moved off of lower opening levels as the EGBs gained momentum on technical trading. In the UK Gilts are currently trading higher after the release of lower than expected trade balance data, but are now off of earlier highs. In additional bond market news overnight Sweden sold SEK2.5B worth of 10-year bonds with an average yield of 3.839%. Portugal sold €1.0B 4.2% 2016 bonds overnight with a bid-to-cover 2.0 and an average yield of 4.128%.
- In Denmak December CPI data, which was released overnight, was slightly ahead of expectations, while harmonized CPI was slightly below estimates. Danish CPI rose on an annual basis for the second consecutive month on increasing concern that prices and wages may experience upward pressure as unemployment is at its lowest level in 32 years.
- The headline CPI rate in Norway fell below estimates overnight to -0.4% m/m and 2.2% y/y. Although the headline number fell, underlying inflation rose for the eighth consecutive month increasing pressure on the Norwegian Central bank to raise interest rates at the next policy meeting; interest rates currently sit at 3.5%. Rising core inflation, which continues to move higher amid the lowest unemployment rate in 18-years, is seen forcing the Norges Bank to take more aggressive steps to curb inflation in coming months. The data pushed the Norwegian Krone lower. l
- The year-to-date Italian deficit to GDP ratio for the third quarter rose to 4.1% from 2.85% in the second quarter, but remained below its 7-year average of 4.44%.
In the UK overnight the visible trade balance for the month of November fell to a deficit of £7.2B, below the expected deficit of £6.45B. While the visible trade balance fell below expectations, the non-EU trade balance fell to its lowest level on record as a deficit of £4.63B. The UK trade deficit widened as imports grew, while the shortfall with nations outside of Europe fell to a record low. While many believe that trade balance figures in the UK are distorted by tax fraud, one source said that trade associated with MTIC fraud had fallen to just £200M in November v £5.4B in March.
- The BRC shop price index for the month of December rose to 2.28% in the UK from 1.81% in November, reaching its highest level since March of 2004.
- The Russian energy minister said overnight that he plans to meet with oil executives to discuss a possible pipeline export halt, and possible output cuts. The WSJ ran a story overnight saying that the Bush Administration has raised royalty payments that it charges oil and gas producers in the Gulf of Mexico to 16.7% from 12.5%. Additionally the Bush Administration will open two previously closed areas of the North Aluetian Bay in Alaska in 2010 and 2012. Front month crude futures have remained in negative territory for a vast majority of the session thus far, but have managed to hold above the $55 handle.

 

- The European indices are currently trading well into positive territory in the session as crude oil prices sit below the $54 handle. During the Asian session crude oil dropped below the $53 handle for the first time since June of 2005.
- European Government Bonds are currently trading lower ahead of the ECB’s interest rate decision, which is scheduled for release at 7:45 ET. Gilts are also trading lower ahead of the BOE decision, which is scheduled for release at 7:00 ET. In new issuance overnight Spain sold €3.5B 3.90% 5-Year bonds with a bid-to-cover of 2.06 and an average yield of 4.006%, The bid-to-cover was below the previous bid-to-cover of 2.36. Italy sold €2B in 30-year 4.00% bonds with an average yield of 4.48% and a bid-to-cover of 1.56, and €2.5B in 5-year 3.75% bonds with an average yield of 4.00% and a bid-to-cover of 1.56. The Belgian Finance Agency announces that they will sell a new 10-Year syndicate OLO 49 soon; the agency also cancelled the OLO auction scheduled on January 29.
- Swedish CPI data for the month of December fell below estimates, easing any pressure on Riksbank to raise interest rates in the coming months. Inflation has held below the nation’s 2.0% target since September of 2003. Additionally overnight the Swedish AMS unemployment rate rose to 4.4% in December from 3.7% in November. The Swedish labor ministry noted that, although there was an increase in the AMS unemployment measure, total unemployment remained unchanged at 7.0%.
- UK Industrial and Manufacturing Production data for the month of November was slightly ahead of analyst estimates with upward revisions to all of the back month figures. The UK data caused a brief upward spike in the pound.
- Final third-quarter Euro-Zone GDP was left unchanged at 0.5% q/q and 2.7% y/y. The EU released its GDP forecasts for the Euro-Zone, forecasting Q406 at +0.3-0.7%, Q107 0.4-0.8%, and Q207 +0.4-0.9%.
- Markets are currently awaiting interest rate decision from the Bank of England and the European Central Bank. While both banks are expected to leave interest rates unchanged at 5.00% and 3.50% respectively, traders will be looking for any indication on when the ECB will raise interest rates. Traders looking for any comments from the BOE will have to wait until the BOE minutes are released on 1/24.
- OPEC President Al-Hamli said overnight that there are no plans for an emergency meeting. Al-Hamli said that it is hard to achieve 100% compliance with output cuts. Al-Hamli expressed concern about the possibility of lower demand in the second quarter, and said that oil at $53/barrel is unacceptable. The IEA’s Mandil said overnight that he is happy to see oil prices going down as they are moving closer to fundamentals. Mandil said that the market is well supplied, but believes that more stocks are needed. Front month crude futures dipped below the $53 handle during the Asian session for the first time since June of 2005; crude futures are now off of session lows and sit just below the unchanged level.

 

- After opening in negative territory the European indices have climbed into and are currently trading in positive territory. Shares of SAP and Conergy in Germany, along with shares of EMI Group in London all fell drastically at the open after all three companies guided below estimates.
- European Government Bonds are trading lower in the session, as are Gilts in the UK. With little economic data bonds await comments from the ECB’s Mersch, Garganas, and Quaden, who are all scheduled to speak at 900 ET.
- French CPI data for the month of December was in line with estimates and held below the 2.0% target for the fourth consecutive month. Lower oil prices have been widely cited as the key factor helping European countries maintain lower levels of inflation.
- Spanish CPI for the month of December was in line with estimates, while core CPI fell slightly below estimates. Core CPI slowed for the fifth consecutive month as Euro appreciation has slowed feeding through into core prices; Core CPI excludes energy and fresh food prices.
- German Finance Minister Stienbrueck announced overnight that the German total public deficit was 1.9% of GDP in 2006 compared to .2% of GDP in 2005. Stienbrueck also announced that Germany borrowed a net of €27.9B in 2006, below the planned amount of €38.2B.
- The German DIW research institute forecasted growth of 0.4% in Q1 of 2007 overnight. The DIW also forecasted Q401 growth of 0.8%. The DIW said that there is no halt to the economic upswing in sight, but believes that the VAT tax will cause a clear dent.
- A top planner in China said projected 2006 GDP at 10.5% overnight noting that 2006 inflation was relatively low. The planner also said that international payment imbalances are worsening.
- An anonymous revolutionary struggle group overnight attacked a US embassy in Athens. Police officials at the scene said that whatever caused the explosion damaged the official embassy sign outside the mission, but there was little other indication of the extent of damage inside. There were no reported injuries.
- Front month crude oil futures are currently trading in positive territory on little news in today’s session, but remain below the $53 handle. Spot gold and spot silver are currently trading higher, while front month copper futures sit in negative territory. Deutsche Bank updated its metal price forecasts for 2007 and 2008 overnight; DB raised its tin, zinc, lead, and aluminum price forecasts for 2007 and 2008. DB also raised its copper price forecast for 2008, but cut its 2007 price forecast by 10%.

 

- The European indices are currently trading in positive territory on speculation that takeovers will continue after General Electric agreed to acquire Smiths Group’s aerospace unit for $4.8B.
- European government bonds are currently trading in positive territory in a rather quiet session. The gilts are shadowing their European counterparts as they move higher in the session. The Belgian debt agency announced that they have opened books for a new 10-year syndicate deal, with guidance of +6-8bps over bunds. Pricing is expected in the middle of this week.
- Italian industrial production fell well below estimates in the month of November as the manufacturing of consumer goods declined. According to some economists the Italian economy is seen trailing those of the other Euro countries at least through 2008.
- In the UK PPI input figures fell below estimates or the month of December with large upward revisions to the November figures. While input data fell below estimates, output rose for the first time in four months increasing inflation pressure in the UK. Despite raising rates in a surprise move last week, the Bank of England said that it sees inflation rising to the middle of the year before falling below the 2.0% target.
- In the UK DCLG house prices for the month of November rose to their highest level since April of 2005 as the residential property market continued to absorb higher borrowing costs. The average house prices rose 0.7% from October to £199,467 ($392,032).
- Euro-Zone industrial production fell below estimates in the month of November as the output of intermediate and non-durable goods stagnated. Although the data fell below estimates there was no major reaction in the market.
- The EU’s Juncker said overnight that the Euro is a shield against oil prices, and that the ECB must ensure cyclical policies during times of economic growth. The EU’s Almunia also spoke overnight as said that there is no evidence that the Euro rate has caused a rise in prices, but noted that there is some evidence of a rise in restaurant prices.
- German Economic Minister Glos forecasted 2007 GDP growth of 1.5-2.0% overnight. Glos said that there has been no lasting impact on competitiveness from the current EUR/USD exchange rate. Further more Glos forecasted average monthly unemployment of 4M in 2007. In related news, an unidentified source said overnight that the German government plans to raise its 2007 GDP forecast to 1.7% from the previous forecast of 1.4%.
- The ECB’s Trichet said during a Euro-Conference held in Slovenia overnight that volatility in oil prices must be taken into account on the ECB’s inflation outlook. Gaspari, the ECB’s newest member from Slovenia, and a known hawk, said overnight that he hopes that the rise in domestic prices is a short-term adjustment. Gaspari also said that there is no room for complacency in the ECB.
- A representative from Oman announced overnight that Oman does not plan to join the Gulf Common Currency in 2010, noting that it will maintain a Dollar peg.
- The Libyan oil minister said overnight that OPEC is currently discussing whether or not to hold an emergency meeting. The Kuwaiti oil minister also acknowledged that a meeting may take place soon if oil prices fall further, but noted that Kuwait would like to gauge the effectiveness of the February 1st output cuts before holding an emergency meeting. Front month crude oil price are currently trading near session lows, and sit just above the unchanged level.
- Markets will be closed in the US today in observance of Martin Luther King day.

 

- The European indices are currently trading in negative territory following a mixed open led by the metal stocks as metal prices decline during what has been termed as a commodity downtrend.
- European Government bonds are currently trading in positive territory in the session. EGBs spiked down upon the release of greater than expected ZEW survey results, but quickly rebounded making way into positive territory. Long gilt futures are currently trading in positive territory. Long gilts spiked down upon the release of CPI and RPI data in the UK, but rebounded off of second support at the 106.77 level. Germany called for bids on €7B worth of two-year 3.75% notes, which will be auctioned on 1/17 in a top-up auction; bids will be called at 5:30 ET.
- Italian Final CPI for the month of December confirmed at 0.1% m/m and at 1/9% y/y.
- As expected CPI and RPI data in the UK rose on all fronts from November. The data not only exceeded last month’s data, it exceeded analyst estimates on all fronts as well. The key CPI y/y figure rose to 3.0%, and was the highest since December of 1995, while RPI Ex-Mortgage interest payments was the highest since September of 1992, and RPI y/y was the highest since December of 1991. The CPI y/y did not break through the 3.0% mark; if the y/y figure breaks the 3.0% mark the BOE’s King must send an explanatory letter to Chancellor Gordon Brown.
- The German Zew survey for the month of January surprised markets as the economic sentiment figure rose to –3.6, and was above expectations of –10.0, while the current situation figure rose to 70.6 to make a new all time high. Zew said that the main reason for January’s rise may be a good labor market. Zew said that demand is likely to remain dynamic, noting that German exports have been helped by high competitiveness. The Zew’s Kohler said that the vat impact could be less than feared, and noted that the German economy is in good shape to cope with the VAT hike.
- The Bank of France revised its Q4 GDP forecast to 0.5% from 0.6%. Additionally the Bank published its business confidence survey, which dropped to 104 in December from 106 in November.
- In a newspaper interview published overnight a central banker said that if CPI is below the 1.5%-3.5% target range, then there is no reason for the Central Bank to speak of raising interest rates.
- A Czech central banker said overnight that interest rates are to stay on hold longer than previously expected, noting that low inflation calls the timing of the next interest rate hike into question. The central banker also said that a firmer Koruna is not a concern.
- The Nigerian Oil Minister said overnight that he wants OPEC to wait until after the February 1st output cuts are implemented before OPEC makes any decisions. In other oil related news Citigroup cut its 2007/2008 oil price forecast by 11.6% to $56.60/barrel from $64/barrel. Front month crude futures are currently trading in positive territory, just above the $53 handle.

 

- The European indices are currently trading mixed after a positive open. Technology stocks were trading to the upside as ASML, the regions biggest semiconductor equipment maker, reported strong Q4 results.
- European government bonds are trading well into positive territory in the session on little news as the session has been rather quiet. Gilts are also trading higher in the UK, and were relatively unaffected by the jobs and earnings data released early on during the session. Germany sold €6.1B in 3.75% 2-12/08 Schatz with an average yield of 3.75%, and a bid-to-cover of 2.0. The bid-to-cover was above the neutral and the previous bid-to-cover, both of which were 1.8.
- CPI data for the month of December was confirmed at 08% m/m and 1.4% y/y. On a harmonized basis the final CPI data was revised down by 0.1% on both a monthly and annual basis. CPI remained below the 2.0% target for the fifth consecutive month in Germany on declining household energy costs.
- In the UK the claimant count rate was in line with estimates at 3.0%, unchanged from November, while the jobless claims change came in at –5.5K, below estimates of –3.5K. November’s jobless claims change was revised to –7.9K from –5.7K making it the lowest number since July of 2004. Unemployment in the UK fell more than expected, signaling that the UK maintained a growth rate that was near its fastest pace in two years. November average earnings figures fell slightly below estimates.
- Euro-Zone CPI was in line with estimates for the month of December, with the exception of core CPI, which was 1.5% against estimates of 1.6%. The November trade balance fell below estimates in November, while the seasonally adjusted trade balance was ahead of estimates; Both figures increased from the previous month.
- Overnight the UK’s Brown commented on the Bank of England’s surprise interest rate hike last week. Brown said that the BOE acted pre-emptively on interest rates, noting that the increase in inflation reflected oil prices and pressure in the housing market.
- The German Industry Association raised its 2007 GDP forecast to “just over 2.0%” overnight. The previous forecast was 1.4%. The Association also said that the strong Euro has not hurt the upward trend in exports.
- The Saudi oil minister reiterated comments that were made yesterday overnight. Additionally the Saudi oil minister said that spare capacity in February will be approximately 3M barrels pre day. Front month crude oil futures are currently in negative territory in the session, and are trading near the $51 handle.

 

- The European indices are currently trading in positive territory in the session as rising energy and metals prices helped push stocks higher. As earnings season has commenced Germany’s Merck released earnings today which were received positively by investors, while Novartis released poorly received earnings, pushing shares lower at the open.
- European Government Bonds are currently trading lower in the session as are Gilts in the UK. The March Euro-Bund fell below the key 115.15 support level on stop selling, reaching its lowest level since July 12th of 2006. Focus largely fell upon the ECB’s monthly report for the EGBs, and on the BCC economic survey as well as comment from the BOE’s Besley for the gilts. Spain sold €1.44B in 3.8% 10-year bonds overnight; the bonds had an average yield of 4.105% and a bid-to-cover of 2.33, which was above the neutral call of 1.8. France sold €5.4B in 3.75% 5-year bonds with an average yield of 4.02% and a bid-to-cover of 2.2. Sweden sold SEK500M in 5-year I/L bonds with an average yield of 2.031% overnight.
- The French current account for the month of November came in above estimates as a deficit of €2.96B. Analysts forecasted a deficit of €4.7B.
- The Italian trade balance for the month of November was slightly better than estimates as a deficit of €918M, while the trade balance EU was a also better than expected as a deficit of €215M. October figures were revised lower for both measures.
- The European Central Bank released its monthly report for the month of January overnight, which was largely unchanged from December. The ECB reiterated that monetary policy remains accommodative, and that risks to the CPI outlook are on the upside. The ECB said that M3 growth remains rapid, and that liquidity is ample. Finally the ECB reiterated that the ECB will act in a firm and timely manner.
- The Bank of England’s Besley said overnight that strength in the UK services sector may push wages higher. Further more Besley said that skill shortages may push up wages in the services sector, and continued by saying that services are probably fueling inflation. Besley said that the MPC minutes (which are due out on 1/24) show the context behind last week’s rate hike. The minutes, according to Besley, showed concern on upside CPI risks.
- The BCC released its fourth-quarter economic survey overnight. Component wise all components rose from the third-quarter with the exception of the factory export-sales index, which fell by 14 points to 20. The services home-orders index, which rose by 9 points to 30, was the highest since Q4 of 2000. In accompanying statements the BCC said that factories reported increased pressure to raise prices. The BCC also said that further BOE rate hikes could jeopardize a recovery in the UK.
- Ahead of the European open the Bank of Japan, which unexpectedly held interest rates at 0.25% in a 6 to 3 vote yesterday, released its monthly report overnight. In the report the BOJ left its assessment of the economy unchanged, noting that CPI is weaker than forecasted in October. The BOJ reiterated that prices and the economy are seen moving in line with the outlook report. Closer to the European open the BOJ’s Fukui reiterated in a press conference that there is no pre-determined timing for interest rate hikes. Fukui said that divided on the firmness of the consumption uptrend, and acknowledged that recent economic data has been mixed. Fukui said that the BOJ needs more time to assess data.
- Germany’s HWWI Economic Research Institute raised its 2007 GDP forecast to 1.7% from 1.1%. Additionally the HWWI forecasted 2008 GDP at 2.0%.
- In oil news overnight the IEA cut its 2006 world oil demand growth forecast by 120K bpd. The IEA also cut its 2007 growth demand forecast; the 2007 forecast was cut by 160K bpd. The IEA said that total OPEC output during December is seen –155K bpd compared to last month at 28.8M barrels. The IEA continued by saying that lower Non-OPEC supply will tighten the global oil balance and push prices higher. In other oil related news the Saudi Arabian oil minister Al-Naimi said that Saudi Arabia aims to raise its sustainable output capacity, and is committed to boosting energy supply. Saudi Arabia seeks to boost output capacity by 12.5M bpd by 2009. Al-Naimi said that oil prices must be high enough to offer adequate return to producers without hurting consumers. Front month crude oil futures currently sit just above the unchanged level between the $52 and $52.50 handles.

 

The European indices are currently trading well into negative territory after opening lower in the session. The stock decline in Europe was led by the technology sector on increasing speculation that growth in the computer industry is slowing.
After falling through the 15-year up-trend line yesterday the Euro-Bund is trading higher in the session. European Government bonds are trading higher as well. In the UK the gilts are trading higher after a sharp but short-lived downward spike upon the release of stronger than expected retail sales data.
Italian industrial and sales data fell below estimates for the month of November. Although the data was weak the numbers tend to be highly volatile, and were close to their respective 15-year averages.
Retail sales exceeded analyst estimates for the month of December, increasing the most in eighteen months as record employment led to increased spending in addition to increased holiday spending. While retail sales data was strong, public finance and net borrowing figures fell below estimates for December. Finally preliminary M4 data rose slightly more than expected reaching 0.9% m/m, and 12.8% y/y, while sterling lending was well below estimates of £16.5B at £11.0B.
The ECB’s Stark said overnight that the ECB’s two-pillar approach has served well in practice. Stark said that price stability promotes growth and job creation, but that price stability is no sufficient for financial stability.
Due to stormy weather Ukranian oil deliveries to Western Europe via the Druzhba pipeline were suspended. Russia’s Transneft noted that the halt did not effect Russian exports. The Ukranian energy minister said that flows were expected to resume by mid-day. Front month crude oil futures, which have spent most of their time in the red today, are currently just above the unchanged level at $50.50.

 

-The European indices are currently trading in positive territory in the session led by energy companies as oil prices rebounded off of recent lows over the past few days.
- European Government Bonds are currently trading higher in the session on technical factors, as are gilts over in the UK. The French Treasury announced overnight that the amount of OAT and BTAN redemptions in 2007 will total at €69B, noting that outstanding government debt stood at €876.6B at the end of 2006.
- German producer prices slowed on an annual basis in December as energy costs declined. On an annual basis, producer prices fell to their lowest level since May of 2005 at 4.4%; analyst forecasts were for 4.6%.
- Swiss producer and import prices slowed in December on lower energy prices. On a monthly basis producer and import prices were in line with their five-year average at 0.0%, but fell below analyst estimates of 0.1%.
- French Finance Minister Breton forecasted the French deficit-to-GDP ratio at 2.6% overnight; similarly, on 1/17, Breton said that the deficit-to-GDP ratio may be below 2.7%. Breton also said that he sees no reason to believe that oil prices will rise any time soon.
- In an interview the ECB's Constancio said overnight that there has been uncertainty surrounding the impact of the VAT hike on the German economy. Constancio also said that growth in the US is slower than expected.
- The IMF's DE Rato said overnight that China's forex rate flexibility can be implemented at a more rapid pace. De Rato continued by saying that Japan's decision to keep interest rates on hold was appropriate. Finally, De Rato said that inflationary pressures in Europe are low, and forecasted oil prices at $52-54 per barrel in 2007.
- - Overnight Rightmove House Prices were released for the month of January. House Prices, which were just below their five-month average in January, rose to their highest level since October of 2004 on an annual basis.
- The Japanese government made a few comments early on in the European session. The Japanese government said that it maintains its view that the economy is recovering despite soft consumption data. The government said that oil prices in Japan, and overseas must be monitored, and that the Bank of Japan and the Government must share economic targets.
- The Qatari oil minister reiterated overnight that there is no agreement to hold any emergency OPEC meeting. Front month crude oil futures have remained in positive territory for what has turned out to be a quiet session.

 

- After a positive open the European indices are currently experiencing mixed trading levels in the session with the DAX and the CAC in negative territory, while the STX50, FTSE100, and SMI are in positive territory.
- European government bonds are trading relatively flat today as traders await German IFO data and bond auction results due later this week. In the UK Gilts are trading higher ahead of the CBI industrial trends data later on, but gilt traders are quiet as they anticipate the BOE minutes which are due out during tomorrow’s session.
- French consumer spending for the month of December reached its highest level since March of 2000 on an annual basis. Consumer spending, which rose unexpectedly, was led by the purchase of cars, which rose 2.4% from November. With unemployment near five-year lows, many analysts see strong consumer spending continuing into 2007.
- Euro-Zone industrial new orders for the month of November were ahead of expectations on robust demand for transport equipment. The October figures were revised slightly higher.
- Comments from an interview with the ECB’s Bini Smaghi were published in La Republica overnight. Bini Smaghi reiterated that rates remain accommodative, and that the ECB must counter inflation. Bini Smaghi said that the ECB’s strategy has not changed, and that the current tightening policy remains intact.
- An interview with the ECB’s Noyer was published in the Liberation overnight. Noyer said that current monetary conditions remain favorable for investment. Noyer commented further saying that there is no conflict between price stability and economic growth.
- A polish central banker said overnight that the central bank should raise rates now in order to fight inflation. The central banker continued by noting that growth is expected to remain strong in 2007, and that the Zloty will continue to consolidate.
- Comments from an interview held with the Bundesbank’s Reckers were released overnight. Reckers said that the ECB must remain vigilant. Reckers followed saying that he sees increased risks to price stability, and that wage moderation must be paramount.
- With little news on the oil front crud oil futures are currently trading in positive territory in the session currently holding above the $53 handle, while spot gold is trading higher by $4.00 nearing the $638 handle.