Thursday 29 July 2010

BOJ Deputy Governor Yamaguchi across the wires (Reuters)…seeking ways to boost potential growth

both upside/downside risks higher than in April Japanese economy gradually improving want to think what more BOJ can do to boost potential growth global market instability is rising again need to work closely with other CBs to ensure market stability export strength gradually spreading to private demand balance sheet adjustment still exerting downward pressure on US & EU economies need to watch if the output gap is sustainable signs of overheating in emerging economies increasing steps to support Japan's growth areas not limited to BOJ's latest lending scheme

BoE considers every option before keeping rates (Barcelona) - The Bank of England stayed on track and kept interest rates unchanged. The minutes show that inflation is considered to subside eventually: "it seemed likely that growth would be weaker than previously expected but, at least for a while, inflation was likely to be higher. But the Committee’s central view remained that the substantial margin of spare capacity was likely to persist for some time and would bear down on inflation over the medium term."

Talks about bringing rates down did take place as stated in the minutes: "The softening in the medium-term outlook for GDP growth over recent months would put further downwards pressure on inflation, once the impact of temporary factors had waned. Pay growth had remained subdued and there was little sign of a material pickup in medium-term inflation expectations. A further modest monetary stimulus would act to offset the softening in demand prospects and make it more likely that the inflation target would be met in the medium term."

Even in the current state of the economy, the committee discussed a raise in rates as well: "Inflation was likely to remain above target for some months and there was a risk that medium-term inflation expectations would rise. The resilience of inflation over recent months had suggested that the downward impact of spare capacity could be weaker than expected and this created uncertainty around the extent to which inflation would fall back in the future."

ForexLive Asian market wrap: chance of RBA rate hike recedes

Australian CPI trimmed mean +0.5% Vs +0.8% forecast Chances of RBA rate hike next week now virtually zero RBNZ expected to raise New Zealand rates tomorrow by 25bps South Korean June current account surplus $4.2 billion South Korean central bank seen buying USD/KRW Annual IMF report on China released: drops reference to Yuan being substantially undervalued UK economy: NIESR raises 2010 forecast but lowers forecast for 2011 Regional stockmarkets up by between 0.25% and 1.9% It has been a moderately busy session here in Asia today, with most of the interest centering on the release of Australia's latest CPI figures. RBA boss Glenn Stevens said last week that the RBA would be watching the number closely, so if he is there wil be no rate hike next week as the trimmed mean showed a significant decline. This coming on the back of Monday's PPI will seal the deal for further pauses. AUD/USD fell from .9020 to .8950 immediately after the number and has been unable to bounce since as traders exit their long AUD positions against all other major currencies. Ranges: AUD/USD .8925/.9025; AUD/NZD 1.2203/1.2334. EUR/USD drifted lower in early trade as early Tokyo booked profits in EUR/JPY after the big move higher in that cross overnight. EUR/USD fell to its session low after the Australian data but has since recovered as the short covering on all EUR cross pairings has continued. Ranges: EUR/USD 1.2968/1.3007; EUR/CHF 1.3767/90. USD/JPY was unwilling or unable to test corporate offers at 88.00 and has slowly drifted lower albeit in fairly tight ranges. AUD/JPY selling has been outweighed by EUR/JPY buying on the crosses. Ranges: USD/JPY 87.66/93; EUR/JPY 113.75/114.30 Cable has been quietest of the major pairings in a 1.5564/96 range and EUR/GBP .8330/43. Markets: Nikkei +1.9%, HK +0.6%, Shanghai +0.9%, Kospi +0.2%. Gold $1162/oz.

Fed’s Lacker: US economic recovery is sustainable

Tighter policy would be appropriate when economic growth strong enough, tough to know when to start normalising Recent US economic data suggests durable turnaround in progress Failure to address US fiscal issues will dim the appeal of Treasuries (across the Reuters newswires)

The European Central Bank maintains 1% interest rate

Thu, Jul 8 2010, 11:58 GMT

Related News (Barcelona) - The Governing Council of the ECB issued today its decision regarding itnerest rates, it met everyone's expectations by an unchanged 1%. Market consensus anticipated the decision correctly.

The other interest rates decided were: marginal lending on 1.75% and deposit facility at 0.25%, Both unchanged from previous meetings

Monday 26 July 2010

European Session News Summary

Euro Zone industrial new orders

Euro-Zone seasonally adjusted industrial new orders was released today, showing a rise in the month of May by 3.8%, compared with the previous 0.9% and the expected -0.1%, while on the yearly scale the index rose by 22.7%, compared with the previous 22.1 and the expected 20.0 percent.

UK's June Retail Sales better than expected

UK released its Advanced June Retail Sales excluding Auto fuel index showing a rise on the monthly scale by 1.0 percent, compared with the previous revised 0.7% and the expected 0.6%, while on the yearly scale the index rose by 3.1 percent, compared with the previous revised 2.9% and the expected 2.4%.

Moreover, Retail Sales including auto fuel rose in the month of June by 0.7%, compared with the previous revised 0.8% and the expected 0.5% while on the yearly scale the index rose by 1.3%, compared with the previous revised 1.7% and the expected 1.0 percent.

Euro zone PMI manufacturing and services beat estimates

Euro zone PMI manufacturing rose to 56.5 from 55.6, while estimates referred to 55.1. Services surged to 56.0 from 55.5, exceeding projections of 55.0. Accordingly, the composite index edged up to 56.7 compared with the preceding 56.0 and median forecasts of 55.5.

French manufacturing expansion ease, while services resume growth

French PMI manufacturing eased its expansion in July to 53.7 from 54.8, while services sustained growth to 61.3 from 60.8, as reported by the preliminary reading. Analysts expected manufacturing and services to reach to 54.1 and 60.0 respectively.

German manufacturing and services resume expansion

German PMI manufacturing resumed expansion in July to 61.2 compared with the prior 58.4 and median estimates of 58.0. Services also expanded to 57.3 from 54.8, beating estimates of 54.5

Euro Zone sovereign debt is slowing growth

European Market Update: Better European data prompts short covering rallies in equities and currencies

Economic Data

- (FR) France Jul Business Confidence: 98 v 94e; Consumer Confidence: -39 v -40e; Own-Company Production Outlook: -9 v -7e; Production Outlook Indicator: -2 v -6e

- (FR) France Jul Preliminary PMI Manufacturing: 53.7 v 54.1e; PMI Services: 61.3 v 60.0e

- (NV) Netherlands Jun Unemployment Rate: 5.5% v 5.6% prior

- (DE) Denmark Jul Consumer Confidence: +4.1 v -1.5 prior

- (GE) Germany Jul Advance PMI Manufacturing: 61.2 v 58.0e; PMI Services: 57.3 v 54.5e

- (TT) Taiwan Jun Unemployment Rate: 5.2% v 5.2%e

- (EU) Euro Zone July Advanced PMI Manufacturing: 56.5 v 55.1e; PMI Services: 56.0 v 55.0e; PMI Composite: 56.7 v 55.5e

- (UK) Jun Retail Sales Ex Auto Fuel M/M: 1.0% v 0.6%e; Y/Y: 3.1% v 2.4%e

- (UK) Jun Retail Sales with Auto Fuel M/M: 0.7% v 0.5%e; Y/Y: 1.3% v 1.0%e

- (HK) Hong Kong Jun CPI - Composite Y/Y: 2.8% v 2.7%e

- (EU) Euro Zone May Industrial New Orders M/M: +3.8% v -0.1%e; Y/Y: 22.7% v 20.0%e

- (RU) Russia Gold & Forex Reserves w/e Jul 16th: $469.3B v $467.3B prior

Fixed income:

- (HU) Hungary sells HUF in 12-month Bills; avg yield 5.75% v 5.43% prior; Bid-to-cover: x v 2.0x prior



- Major European PMI readings generally better than forecasts; UK retail sales beats estimates; Better European economic data for July as concern over the sovereign-debt crisis eased coupled with an increase in global trade spurred its exports.

- Fed's Bernanke Senate testimony dampens all optimism on US economy.

- Brazil Central Bank raise SELIC Target by 50bps; less than the 75bps hike expected

- Chatter circulating that EU stress test results being released earlier than the planned 16:00 GMT On Friday, July 23rd

- EU Trade Chief: Greece and Spain bonds good investment for China.

- IMF: Euro Zone sovereign debt is slowing growth.


- As of 5:45am ET Euro Stoxx 50 Index +1.7% at 2,684 ; DAX Index +1.4% at 6,075; CAC-40 Index +1.6% at 3,550 and FTSE 100 Index +0.9% at 5,260


- ABB [ABBN.SZ] Reports Q2 Net $623M v $545Me, EBIT $975M v $850Me Rev $7.6B v $7.5Be

- Faurecia [EO.FR] reported H1 Net €101.9M v loss €364.6M y/y, Rev €6.8B v €4.4B y/y

- Syngenta [SYNN.SZ] reported H1 Net profit $1.3B (ex charges) v $1.4B y/y, Rev $6.7B v $6.7B y/y

- Technip [TEC.FR] reported Q2 Net €106M v €102Me, Rev €1.49B v €1.5Be; on track to deliver 2010 objectives

- Volvo [VOLVB.SW] reported Q2 Net SEK3.15B v SEK2.17Be, Rev SEK68.8B v SEK65Be

- SSAB AB [SSABA.SW] reported Op profit SEK708M v SEK697Me, Rev SEK10.9B v SEK11.1Be

- Outokumpu [OUT1V.FH] reported Q2 Net Profit €44M v €43Me; Sales €1.11B v €1.1Be


- Credit Suisse [CSGN.SZ] reported Q2 Net CHF1.6B v CHF1.4Be, Rev CHF8.4B v CHF7.7Be

- Swedbank [SWEDA.SW] reported Q2 Net SEK1.6B v SEK651Me, Net interest income SEK3.8B v SEK4.1Be

- Banco Sabadell [SAB.SP] reported Q2 Net €125.2M v €108Me, H1 Net Interest Income €765M v €747.4Me


- Lonza Group [LONN.SZ] reported H1 Net CHF 135M v CHF113Me, Rev CHF1.3B v CHF 1.4Be

- Ferrexpo [FXPO.UK] cancelled $500M bond sale, citing cost of refinancing as too high


- Biomerieux [BIM.FR] reported H1 Rev €651M v €638Me. Guided FY10 Rev up 6% y/y (had previously guided +7%)

- Roche [ROG.SZ] reported H1 Net CHF5.7 v CHF5.6Be, Rev CHF24.6B v CHF25Be; confirms outlook

- Nicox [COX.FR] received letter from FDA stating that painkiller Naproxcinod was NOT approved


- Mobistar [MOBB.BE] reported H1 Net €132.4M, EBITDA €281.6M v €282Me, Rev €818.8M v €815Me; Raises FY10 outlook

Consumer discretionary

- Remy Cointreau [RCO.FR] reported Rev €171M v €138M y/y

- Praktiker [PRA.GE] reported Q2 Net €15.1M v €29Me y/y, Rev €1.04B v €1.0Be; Cuts guidance for FY10 in the low single digit range, below 2009 (implies below €3.7B) (prior in line with 2009 levels)

- Kingfisher [KGF.UK] provided Q2 preclose update: Like-for-like sales -0.8%; Total sales +0.3%; Consumer spending remains under pressure, notably in the UK

- Pearson [PSON.UK] acquired Sistema Educacional Brasileiro's learning system for $497M in cash; to be accretive to EPS in 2011

- Stora Enso reported Q2 Net €159.1M v €159Me, Rev €2.7B v €2.4Be


- Scottish & Southern Energy [SSE.UK] provided interim management statement: Several months marked by low production of renewable energy; Still on course to grow dividend as forecasted


-Autonomy [AU.UK] reported Q2 Net $54.2M v $50.9M y/y, Rev $221M v $195M y/y


- Hungary PM spokesperson: Country to negotiate with EU regarding next year's budget

- Japan ruling party: Reiterates prior view that govt should maintain new JGB sales at ¥44.3T during the next fiscal year

- EU's Rehn says trusts stress tests will give clear picture of state of European banking system

- China Central Bank Vice Gov Hu Xiaolian: Will adjust currency rate with reference to trade balance. He reiterated the view that China's managed float exchange rate system to focus on currency basket and not one currency

- EU Regulator CEBS: Not aware of any change to stress test release schedule

- World Trade Organization (WTO) director Lamy: China is adhering to the organization's rules

- China President Hu: Reiterates to maintain 'moderately loose' monetary and 'proactive' fiscal policy in H2

- Currencies: The USD tried to maintain its recent ranges against the European pairs as Fed Chairman Bernanke's comments late Wednesday to the Senate panel seemed already reflected in recent run of soft US economic data in recent weeks. The dollar's tones turned a bit sour as the major European PMI data exceeded expectations. The UK retail sales data was also above forecasts. The EUR/USD moved off its pre European lows of 1.2740 to test 1.2850 aided by Eastern European names seen buying the pair. The better series of data prompted a short covering squeeze in European equities and the 'rise' in risk appetite took its toll on the greenback in the session.


- In British politics, a recent poll conducted by YouGov placed the Liberal Democrats to its lowest approval rating under Deputy Prime Minister Clegg at 13% against the time of the campaign election at 31%.

- Germany's proposed atomic energy tax may run into problems with European law; the levy would bring in an estimated €3.2B as part of the country's budget consolidation

In the Papers:

- Bank of England member Dale, in an interview with the Independent, stated that British growth and inflation outlook deteriorated in the past couple of months, and that growth is softening, though still sees inflation above target at year end.

- Telegraph's Evans-Pritchard commented on safe haven demand for the Swiss Franc and the losses disclosed by the Swiss National Bank, and referencing analysts at HSBC, if there is a US slowdown, then everyone will buy Swiss Francs. He further states that now that Japan's debt is about 200% of GDP, the CHF has displaced the yen as the ultimate safe haven.

- Also in the Telegraph, following the recent Bank of England minutes some economists believe the central bank could restart its quantitative easing measures. Note this is the first discussion of a possible extension to its quantitative easing since February.

- WSJ running the headline "Euro rally is preclude to a decline". The article noted that the recent rally may be little more than a "summer fling"

Looking Ahead

- 6:00 (CZ) Czech Republic to sell CZK7.0B in 91-day Bills

- 7:00 (BR) Brazil Jul FGV Consumer Confidence: no est v 118.5 prior

- 8:00 (BR) Brazil Jun Unemployment Rate: 7.3%e v 7.5% prior

-8:30 (CA) Canada May Retail Sales M/M: 0.4%e v -2.0% prior; Retail Sales Less Autos M/M: 0.5%e v -1.2% prior

- 8:30 (US) Initial Jobless Claims: 445Ke v 429K prior; Continuing Claims: 4.590Me v 4.681M prior

- 9:00 (US) May RPX Composite 28-day Y/Y: No est v 2.36% prior

- 9:00 (SA) South Africa Central Bank (SARB) Interest Rate decision: Consensus expectations (70%) to maintain interest rates at the current 6.50% level (range of estimates from unchanged to cut 50bps (30%)

- 9:00 (HU) Hungary PM address to Parliament

- 9:30 (US) Fed Bernanke Monetary Report to House panel

- 9:30 (US) Fed's Dudley

- 10:30 (CA) Bank of Canada monetary report

- 10:00 (EU) Euro-Zone Jul Advanced Consumer Confidence: -17e v -17 prior

- 10:00 (US) Jun Existing Home Sales: 5.10Me v 5.66M prior

- 10:00 (US) May House Price Index M/M: -0.3%e v 0.8% prior-

- 10:00 (US) Jun Leading Indicators: -0.3%e v 0.4% prior

- (CO) Colombia Central Bank Interest rate Decision: Unanimous analyst expectations is for the Overnight Lending Rate to remain steady at 3.00%

U.S Market Update

Economic Data

- (CZ) Czech Republic sells CZK7.0B in 91-day Bills; avg yield %; bid-to-cover
- (BR) Brazil Jul FGV Consumer Confidence: 120.0 v 118.5 prior
- (BR) Brazil Jun Unemployment Rate: 7.0% v 7.3%e
- (CA) Canada May Retail Sales M/M: -0.2% v 0.4%e; Retail Sales Less Autos M/M: -0.1% v 0.5%e
- (US) Initial Jobless Claims: 464K v 445Ke; Continuing Claims: 4.487M v 4.590Me
- (SA) South Africa Central Bank (SARB) maintained interest rates at 6.50%; as expected
- (EU) Euro-Zone Jul Advanced Consumer Confidence: -14 v -17e
- (US) Jun Existing Home Sales: 5.37M v 5.10Me
- (US) May House Price Index M/M: 0.5% v -0.3%e

- (US) Jun Leading Indicators: -0.2% v -0.3%e
- EIA Natural Gas Inventories: +51bcf vs. +50 to +55 bcf estimated range

- Very strong corporate earnings reports - including excellent results from several major DJIA components - and some stronger than expected data from both sides of the Atlantic are propelling US equity indices higher. Before the open equities had regained levels seen before last Friday's post-Citibank/BoA slide, and the indices are up even further in mid morning trading. Two modestly positive housing data reports are adding to the positive tone: both the June existing home sales number and the May house price index came in above expectations (although the June home sales data fell below May levels). The NAR warned that June sales are still showing the impact of the tax credit impact. Note also that Chinese President Hu offered supportive rhetoric overnight, saying that China would improve consumption stimulus measures in the back half of the year fueling investors risk appetite. Crude is creeping higher with the front-month contract trading just shy of $79. Copper is hitting two-month highs, while gold is also up, with the August contract within striking distance of $1,200. Fed Chairman Bernanke is testifying before the House this morning, although so far his comments have largely echoed remarks made yesterday before the Senate. Treasury markets have seen some profit taking through both an unwinding of flight to safety trades and profit taking ahead of next week's $104B in scheduled coupon supply. Yields have not backed up all that aggressively though, with the benchmark 10-year still below 2.95%.

- Quarterly results from Dow components UPS, Caterpillar, 3M and AT&T were strong, with outperformance seen on both top- and bottom lines and full-year guidance adjusted higher. UPS's average daily volume was a bit soft, and the CEO warned that the company is not counting on a significant uptick in the economy in the second half of the year. Executives from 3M echoed this comment, and also warned that the period of "easy y/y" comparisons is now over and that it will be more difficult to show improvement in key metrics moving forward. Cat really crushed earnings estimates and boosted its 2010 outlook considerably. Cat also announced plans for two major new facilities in the US and China. AT&T reported one of its lowest postpaid churn numbers ever, although it wireless adds were a bit soft. All four names are driving strength in the DJIA, with UPS up a whopping 7%, CAT up 2% and MMM and T up 3%.

- Rail name United Pacific is up 6% in early trading after beating consensus earnings estimates by a wide margin. Steelmakers Nucor and Reliance Steel are both up more than 3%, although both names were only slightly ahead of the Street on earnings and revenue in their quarterly reports. Note that Reliance missed targets in its guidance for next quarter. Nucor noted that residential and non-residential construction markets continue to show "little, if any, strength."

- Shares of semi major Qualcomm are up 8% in early trading after the firm modestly exceeded earnings and revenue targets. The firm's guidance for next quarter and the full year was also raised somewhat. Note that Qualcomm said the impact of the euro is more than offsetting higher ASPs. Competitor Xilinx also beat expectations modestly, although XLNX is only up 2%. The company said the June quarter marked its third consecutive quarter of record sales. Cypress Semi's shares rose as much as 6% despite the firm's big miss on earnings, although they are well of their best levels. Hard drive maker Western Digital also missed EPS targets, which combined with very weak guidance for next quarter is sending shares of WDC lower, around -5% on the day. Both eBay and Bidu are off their highs. Ebay was in line with expectations and its net payment volumes grew sharply y/y, though its guidance for next quarter was soft.

- Regional banks Fifth Third and SunTrust crushed EPS expectations, with very strong improvements in key metrics. SunTrust was still in the red, but is closer to profitability than any time in the last 18 months. Both banks continue to show big improvements in loan and credit quality. Shares of FITB and STI are up 8% or so. BB&T is lagging after the bank missed earnings expectations by a hair. BB&T's credit quality is not showing the improvements seen among other regionals.

- The greenback tried to consolidate earlier losses against the European pairs during the NY morning but rising risk appetite proved too much of a force to resiste. North American dealers focused on the comments out of China, savoring the global growth potential. The commodity-related currencies are taking the lead, aided by Caterpillar's results. AUD/USD rallied above the 0.89 handle while USD/CAD was able to shake off the poor Canadian retail data. In a monetary policy report, the Bank of Canada lowered its Q2 GDP view to 3.0% from 3.8% prior. EUR/USD tested the 1.29 level during the mid-NY morning where some technical resistance was curbing upside momentum for the time being. Dealers are preparing for a event filled Friday ahead of the EU banking sector stress test results.

Looking Ahead

- 16:00 (US) May RPX Composite 28-day Y/Y: No est v 2.36% prior
- (CO) Colombia Central Bank Interest rate Decision: Unanimous analyst expectations is for the Overnight Lending Rate to remain steady at 3.00%

Bernanke's downbeat assessment disappears

There are two ways to take the words of the Fed Chairman. You can join the crowd of Chicken Littles running through the streets screaming that the sky really is about to fall. Or you can take his promise to act further on policy at face value and buy with both hands on the promise of more stimulus. Today’s response is a reversal of the initial view. Anyone contrarian who went home long of commodity sensitive dollars is certainly ahead of the crowd with the Australian dollar vaulting to a two-month high versus the dollar overnight.

Fx View

U.S. Dollar – The “unusually uncertain” words from Mr. Bernanke were attached to a threat to deliver more monetary stimulus. The response was an elevation in the general level of panic sending equity prices lower and the dollar higher. But U.S. corporations are delivering strong earnings with around 82% of the S&P 500 index constituents surpassing expectations. Thursday’s risk rebound looks set to punish the dollar on a weaker yield curve outlook in the months ahead. The dollar index has slumped to 82.79 this morning.

Euro – On the day ahead of the release of stress testing results, the euro has rebounded sharply. Investors seem to have concluded that the publication might underscore the health of the financial system, which has concerned them for too long. The euro rebounded from a $1.2732 low inspired by Mr. Bernanke to reach $1.2879 on Thursday after data vilified ECB President Trichet. After a recent monetary policy meeting, the chief warned that outsiders were missing the strength of a rebound within the Eurozone during the second quarter. The release of expansive manufacturing activity today once again helped cast off that gloomy view.

The Eurozone’s composite PMI index reading for July rose to 56.7 with services and manufacturing equally heading further into expansive territory. Each index, however, was expected to decline in line with other readings from leading nations. The news was a surprise and along with the increasingly weaker tone to the dollar, the euro made sustainable gains. Further vilifying Mr. Trichet’s stance was an increase in new orders for industrial and manufacturing goods throughout May, which grew by 3.8% on the month to stand 22.7% higher than one year ago. The euro also rose to ¥111.66.

Japanese yen – Discussion continues to center on the strength of the Japanese yen and whether authorities will intervene to cheapen it. Today the yen reached ¥86.34 before investors took profits. More government and central bank officials warned today that the excessive yen gains of late were the biggest threat to the economic recovery. However, with consumers still responding to government encouragement to spend on electrical items, the recovery continues to head in the right direction.

British pound – A strong retail sales report encouraged belief that the economic recovery is sustainable and will whether the likely forthcoming loss of public sector job cuts. The pound rose to $1.5296 before profit-taking set in. Chief economist at the Bank of England confirmed the complications to the inflation profile as a result of the VAT increase set for next year. Spencer Dale reckons inflation won’t return to the 2% central target until 2011 as a result. The pound will likely win more friends as long as the recovery remains on track.

Aussie dollar – The Aussie flew overnight and reached its highest in nine weeks after investors jumped on the kangaroo having leapt through strong overhead resistance at 88.71 U.S. cents. The Aussie rose to as high as 88.98 at its best point of the day as risk aversion shone through. There was no data to inspire the move, which is likely the capitulation of several frustrated bearish bets on a risk aversion decline in the Aussie.

Canadian dollar – The Canadian dollar was also in demand as a commodity dollar this morning but faced the headwind of worse than expected retail sales during May. Forecasters called for a gain of 0.4% for the month but were disappointed by a decline of 0.2%. Sales excluding autos dipped by 0.1% having been expected to add 0.5%. A climb to 96.16 ran into trouble as the dollar slid to 95.54.

Investors Will Focus on the Advanced Q2 GDP, while the Earnings Season Continues

The United States economy is facing another important week, where investors will be waiting for the first GDP estimate for the second quarter, while investors will be also focused on companies’ earnings, as so far most companies reported rather strong results for the second quarter of 2010.

The start though will be with data from the housing market, where recent figures from the housing market suggested that activity was deteriorating over the past few months as a result of elevated unemployment, tightened credit conditions, and rising foreclosures, however, the new home sales are expected to rise in June, though we might witness some deterioration in new home sales.

The S&P/CaseShiller house price index will be also released, where the Composite-20 index is expected to show that house prices increased by 3.73% compared to a year earlier, while compared to last month, house prices were probably unchanged.

The housing sector suffered deeply after the termination of the government’s tax credit program which indeed boosted activity in the housing market, and once the program had finished, demand for houses declined noticeably.

The consumer confidence index released by the Conference Board is expected to show deterioration in confidence levels among consumers, however, the final estimate for the University of Michigan confidence is expected to show that consumer confidence rather improved.

Also, the durable goods orders are expected to have risen in Jun on both the headline index and the excluding transportation index, though given the recent development in economic conditions, we would expect the index to fail estimates, as demand levels from both consumers and producers seem to have faltered recently.

Meanwhile, the Fed’s Beige Book is not expected to provide anything new to the outlook, where Bernanke signaled in his testimony last week before the Congress that the recovery seems to be losing pace amid the ongoing challenges that continue to weigh down on overall economic activity.

Also, the Chicago PMI Index is expected to confirm the recent weakness demonstrated throughout the nation’s manufacturing activities, where we witnessed the slump in the ISM manufacturing index, which indeed signaled that manufacturing activities is also experiencing some deterioration.

Finally, the Advanced estimate for the Gross Domestic Product will be released for the second quarter, where expectations signal that the economy continue to grow over a slower pace in the three months ending June, as the GDP is expected to show that the economy expanded by 2.5% only, compared with the prior reported growth in the first quarter of 2.7 percent.

The U.S. economy clearly lost some momentum during the second quarter of this year, where activities in the manufacturing, services, and the housing sectors all started to ease, especially in May and June, nevertheless, the economy will continue to recover according to Fed’s Chairman, Ben Bernanke, who attested that the economy will slowdown but will not undergo a “double dip recession.”

Also this upcoming week, more U.S. corporations will announce their financial results for the second quarter of 2010, where among those we have Exxon Mobil Corp, Chevron Corp, Merck & Co Inc, AON Corp, Amgen Inc, First Solar Inc, Moody’s Corp, and several more others, and accordingly we should expect more fluctuations in financial markets, especially stock markets, where we witnessed last week huge fluctuations in stock markets, after some companies failed to meet estimates, while many others impressed.

London Gold Market Report

Gold Breaks $1200 as Europe's "Secretive" Bank-Stress Tests Fail to Reassure Investors

rose to a 5-session high above $1200 an ounce early Friday, showing a week-on-week gain for US, Euro and Japanese investors but holding unchanged against Sterling and Swiss Francs.

Government bonds edged lower as silver bullion held flat and crude oil slipped back through Thursday's 11-week high of $79 per barrel.

Yesterday's 2% gain on Wall Street – plus a strong rise in Asian stocks – failed to spur more than a 0.3% rise in European equities, as investors and traders awaited the "stress test" results on 91 regional banks.

"The correlations for gold prices are all over the place at the moment," says Phil Smith at Reuters Technical in Beijing, "and it is actually high-positive with the US Dollar – which is not normal.

"Breakdowns in 'normal' correlations generally point to a switch in the attitude to risk, and gold seems to be undergoing a rethink by some investors after its huge rally over the past years."

Undertaken by what the Associated Press calls the "the little-known" Committee of European Banking Supervisors (CEBS) here in London, "the release of bank stress-test results is unlikely to be the silver bullet that guarantees a rapid normalization of the financial system," says UniCredit's chief economist, Marco Annunziata, "given the recalcitrant and rather secretive way in which it has been prepared."

Rumors in the European press saw Greece's Atebank drop 4% of its value this morning, while Madrid's El Pais said Spain's "caja" savings banks were likely to fail.

"The ratio of Tier I capital, reserves and preferred stocks that an institution must hold to survive the stress test's assumed risks comfortably is 6%," says the paper, "although the legal requirement is 4% minimum."

A survey by Goldman Sachs of 376 professional investors and analysts said today that 10 of the 91 European banks tested may "fail", and so need to raise fresh capital from shareholders.

On the economic front today, Germany's Ifo business sentiment index came in sharply ahead of expectations, as did the UK's latest GDP data, showing 1.1% growth between April and July – the fastest pace in four years.

Both the Pound and the Euro jumped in London trade, nearing Monday's 11-week highs against the Dollar and driving the gold price down to £775 and €925 per ounce respectively.

"There is little doubt that the need to implement a credible medium-term fiscal consolidation strategy is valid for all countries now," writes European Central Bank chief Jean-Claude Trichet in today's Financial Times, concluding the newspaper's week of 'Austerity vs. Stimulus' debate.

"The ECB will contribute to consolidate a confident economic environment by ensuring price stability...Sound public finances are [also] a decisive component of economic stability and sustainable global growth."

Across in Washington on Thursday, however, "In the short term I would believe that we ought to maintain a reasonable degree of fiscal support, stimulus for the economy," said US Federal Reserve chairman Ben Bernanke to the House Financial Services Committee.

The current bull market in gold bullion and other precious metals "is the direct result of the evident profligacy of governments the world over," says John Browne, senior market strategist at asset-management group Euro Pacific Capital.

"Spendthrift politicians in Washington, London, and Tokyo, have caused people to lose faith in paper currencies."

"Spiraling deficits, ballooning government debts and risk of eventual monetization" are all supporting gold prices, agrees BMO Global Commodities strategist Bart Melek, quoted today at MineWeb.

"The expectation that the Fed, the ECB and other central banks will largely be on hold well into 2011 are additional factors that are likely to keep investors buying gold and willing to pay a premium for the insurance properties the metal offers."

"We believe that US interest rates will remain low for much longer," wrote Walter de Wet at commercial and bullion bank Standard Bank yesterday.

Citing the Taylor Rule – which suggests interest rates "by balancing the Fed's two major targets, inflation and unemployment" – the Fed will keep rates at zero until "at least 2012," reckons the Standard Bank team, and "low rates in the medium term are bullish for gold, despite our view that inflation will remain low.

"Confidence in the strength of emerging-market currencies [also] indicates that risk appetite for precious metals may remain firm."

Toyota, Sony rumored to beat consensus on strong EM demand

Asian Market Update: Australia Q2 PPI tempers expectation for surprise RBA hike in August; Toyota, Sony rumored to beat consensus on strong EM demand

As of 1:30amET:

- Nikkei225 +0.7%

- S&P/ASX +0.7%

- Kospi +0.7%

- Taiex +0.3%

- Shanghai Composite +0.1%

- US S&P Futures +0.2% at 1,102

- Gold Aug $1,191/oz

- Crude oil unchanged at $79.02/brl

Economic Data

- (KS) SOUTH KOREA Q2 PRELIM GDP Q/Q: 1.5% V 1.3%E; Y/Y: 7.2% V 6.9%E


- (AU) AUSTRALIA Q2 PPI Q/Q: 0.3% V 0.8%E; Y/Y: 1.0% V 1.5%E (1 year high)

- (SI) SINGAPORE JUN INDUSTRIAL PRODUCTION M/M: -23.4% V -14.0%E; Y/Y: 26.1% V 38.4%E

Overview/Top headlines

- Equity markets are opening the week in rally mode, tracking another session of gains seen in the US on Friday. Risk-related FX majors are also shrugging some mixed regional economic data. A key economic event on the session, Australia Q2 PPI was notably below consensus estimates as fixed income market repriced probability for an early August hike to 25% fom 30%. However, AUD/USD shrugged the post-data decline late in the day, testing 2-month high around 0.8980. Likewise, despite a widespread critique of the EU stress tests as not being sufficiently stringent, the focus on appears to be on diminished uncertainty over the health of the EU banking system. Both EUR and GBP and also in rally mode against the floundering greenback: EUR/JPY rose above 113.40 - the highest level since early June - and GBP/USD hit a 3-month high at 1.5470. Commentary from several WSJ reports on the stress tests appears to be far more scathing. One of the pieces says the "mild assumptions" include EU GDP falling 0.2% this year and 0.6% next year and Spain unemployment rising to 20.3% from current 20% under "adverse scenario" - both under adverse scenario. Moreover, a separate report says the next challenge for EU banks is in fundraising to finance further lending to non-financials, given that EU's reliance on bank lending for financing is substantially heavier than in US, where companies are more willing to tap the capital markets.




- (CH) PBoC's Hu Xiaolian: Greater FX flexibility to help China cap inflation and avoid asset bubbles

- (CH) China SAFE: China's excess liquidity may lead to asset speculation


- (CH) PBoC Adviser Xia Bin: Warns against implementing property measures too fast as economy already shows signs of slowing in H2 - China Business News

- (CH) China's Finance Ministry Research Director Jia Kang: Property tax will not affect first homes; Sees 2010 fiscal tax revenue rising 13-17% y/y - Chinese press

- (CH) China to carry out stress tests on property trust loans - Economic Observer; In the first half of this year Chinese trust firms issued property trust investment plans totaling ¥67.7B, compared to ¥40B for the whole of 2009.

- (CH) China Ministry of Finance Tax Dept official Yin Boqin: China's property tax may be applied on graduated basis and levied on market value of the property rather than the price paid - Chinese press


- (CH) China Academy of Social Sciences (CASS) economist Yang Tao sees 2010 GDP at 9.5-10% range; Expects inflation to remain below 3% as growth slows in H2 - Chinese press

- (CH) China NDRC researcher Zhang Yansheng: Export growth likely to slow in H2 because of weaker EU demand, higher production costs, and inflation expectations - People's Daily

- (CH) China Electricity Council: 2010 power demand to rise about 12% y/y, slow to 5% growth in H2


- (AU) Australia Treasury Pre Election Forecasts: Reiterates forecasts for FY11 and FY12 GDP

- (AU) Australian mining lobby plans to resume their advertising campaign against the mining tax

- (AU) The Australian warns the progress being made in Panama Canal project may benefit Atlantic-based miners like Vale at the expense of Australian miners

- (AU) Australian banks are expected to proceed with fund raising efforts internationally after the successful completion of the European stress tests - Sydney Morning Herald

- (AU) Australia's Access Economics reports that the Reserve Bank of Australia may be forced to raise interest rates due to increasing inflation pressures - The Australian


- (JP) Japan Finance Ministry raises quarterly economic assessment in Q1

- Japanese Press

- (JP) Japan Govt Spokesman Sengoku: Asking ministries for a 10% spending cut in the 2011/12 budget; extra budget to be well above ¥1T to stimulate economic sectors with growth potential

- (JP) Japan Fin Min Noda: Hopes EU stress test will calm investor concerns; Debate needed regarding overhaul of tax system, cannot rely on govt debt issuance

- (JP) Japan PM Kan's approval rating fell 2pts to 41%, disapproval rating rose 4pts to 40% - latest Mainichi poll


- (KS) Bank of Korea Gov Kim: Economy likely to have entered expansionary phase

- (KS) US and South Korea began their 4-day joint war games in the Sea of Japan (east of Korean peninsula) despite opposition from the North as well as from China - Washington Post


- (NZ) New Zealand Unions go up in arms over proposed new labor laws announced by the government - Dominion Post

- (SI) Singapore National Development Min Mah Bow Tan: There is an imbalance in the housing resale market that may take a year or so for prices of resale flats to stabilize - Straits Times

- (VN) Vietnamese smaller banks are struggling to find affordable sources of funds for loans while major banks have an excess of funds due to the central banks limited lending to the interbank market - Tuoi Tre

- (VN) Vietnam's trade deficit for January to July is expected to reach $7.4B v $3.9B y/y - Vietnam press

- (TT) China Banking Regulator (CBRC) to allow Taiwan banks to apply for licenses to set up mainland branches - Commercial Times citing Taiwan's financial regulator



- HVN.AU: Reports Q4: FY Sales +0.8% y/y; SSS -3.4% y/y

- QBE.AU: Guides H1 Net down about 40% y/y; Gross premiums A$6.9B, +20%

- ROC.AU: Reports Q2 output 8.2K BOEPD v 8.7K BOEPD q/q

- WES.AU: Reports Q4 Coles unit +5.5% to A$7.5B; FY +4.3% at A$29.8B

- CBA.AU: CEO Norris: Says NAB claims are "rubbish" and that the comments are a result of NAB's "poor" performance in the mortgage market - Australian

- FMG.AU: CEO Forrest is going to take a less active role in the company in the near future and will be replaced by Worley Parsons - The Australian



- TM: May post Q1 Op profit about ¥100B (profit ¥82Be, loss ¥195B y/y) - Japanese press (update)


- SNE: May report Q1 Op profit of ¥10-30B (¥2Be, loss ¥37B y/y) - Japanese press

- Fujitsu Ltd to begin selling low-end PCs in Asia and N America in FY12 - Japanese press

- Sharp Corp providing smartphones to AT&T that are capable of receiving video transmitted using MediaFLO technology - Japanese press

- Fuji Electric Holding may raise its investment in semiconductor business by about 20% to ¥12B - Japanese press


- Mizuho, Sumitomo Mitsui Financial, and Mitsubishi UFJ each may have exceeded ¥100B in profit for the quarter ended June - Japan press

- Softbank Corp denies press speculation that it may report ¥190B op profit in Q1 (¥133Be)


- NTT DoCoMo to increase supply of Xperia smartphone by 200k units by the end of July to meet increase in demand; FY sales goal of 1M units - Japanese press

- Sanyo Chemical raises FY10/11 guidance to Net ¥5.1B, Op Profit ¥8.6B, Rev ¥133B (prior Net ¥3.8B, Op Profit ¥6.6B, Rev ¥127B)

- Daiichi Sankyo denies press speculation that it is forming a joint venture with Kitasato Institute Research Center to increase vaccine production


- China State Construction Holdings awarded HK$3.0B contract from Hong Kong Government

- HSBC, Sedco in a consortium are close to signing a deal to fund the £600M Pinnacle skyscraper in London - Times

- China Resources Power reportedly going to issue benchmark size dollar bond due in 2015

- BIDU: In talks with mobile phone makers about using its search box on handsets sold in China; Also considering listing in China with no time line given - WSJ

- PTR: Increases 2010 Sulige gas output to 10B cubic meters

- Citic Resources put in an application to spin off Citic Dameng, its manganese unit; Assets being spun off are in China and West Africa; No set date for the spin off as of yet


- Hyundai Motor Vice Chairman Chung Eui-sun: Company's H2 outlook for sales does not seem "rosy" - Korean press

- Kookmin Bank nominated Min Byong-duk as the next CEO; Names Lim Young-rok President

- Korea Exchange Bank company expected to pay its first interim dividend - Korean press

- (KS) According to South Korea Finance Ministry officials, both KB Financial and Woori Finance will report Net losses in Q2 on rising bad loans for construction projects - Korean press


- XAU/USD: WSJ citing analysts argue against a sharper decline in Gold prices in coming weeks

- (CH) China is aggressively developing its own LNG reserves which will drastically reduce the need to import by 2020 - FT

- (CH) China govt to limit output of certain kinds of non-ferrous metals to 41M tons by 2015 - China Securities Journal citing industry association

- (CH) China NDRC: CNOOC H1 gas output rose over 30%; Sees output as stable

A couple of Polish numbers were released on Friday


  • A couple of Polish numbers were released on Friday. Retail sales surprised on the upside, growing 6.4% y/y in June compared with the consensus expectation of 4.1% y/y. Unemployment dropped a bit in June to 11.6% from 11.9% in May. Both numbers confirm that the recovery in the Polish economy continues and that rate hikes have moved closer.

  • Friday brought more bad news regarding the situation in Hungary as the two rating agencies Moody’s and Standard & Poor’s both came out with warnings that they could downgrade Hungary’s credit rating on the back of the breakdown of talks between the Hungarian government and EU/IMF. Unfortunately, the Hungarian government once again demonstrated that it does not seem to take the concerns of investors, lenders and rating agencies seriously as Economics Minister Gyorgy Matolcsy said that the rating agencies “don’t understand” that fiscal responsibility needn’t come at the expense of independent economic policy. Telling rating agencies that they don’t understand is not going to do much for the credibility of economic policy in Hungary.


  • Not much on the agenda today in the region other than Hungarian retail sales. We expect the Hungarian retail sales numbers to confirm that the Hungarian economy and domestic demand in particular continues to be very weak.

Scorecard-based trade of the week Buy CZK/ZAR

  • The Hungarian forint once again was the big loser on Friday as the warnings about possible downgrades hit the Hungarian markets. We remain bearish on the forint and EUR/HUF could easily move above 300 soon if the Hungarian government does not take action to reassure investors that it is serious about getting back to negotiations with the IMF and EU.

  • On Friday we recommended investors to buy CZK/ZAR based on the scores in our EMEA FX Scorecard. We keep that trade open and with EUR/USD inching up towards 1.30 again, the trade is getting a bit more tailwind. In our view, we could be heading for a larger negative correction in the South African rand sooner rather than later.

Bull buys call spread as Arena Pharmaceuticals' shares soar

ARNA - Arena Pharmaceuticals, Inc. – Shares of the clinical-stage biopharmaceutical company shot up 10.7% today to an intraday high of $5.89, inspiring one options strategist to purchase a debit put spread in the October contract. Arena’s shares have increased significantly since an FDA advisory panel said it does not recommend rival Vivus’ obesity drug, Qnexa, receive FDA approval. The bullish options investor prepared for continued upward movement in Arena’s shares by purchasing 3,000 now in-the-money calls at the October $5.0 strike for a premium of $2.45 each, and selling the same number of calls at the higher October $7.0 strike at a premium of $1.45 apiece. The net cost of the transaction amounts to $1.00 per contract. Thus, the trader is prepared to make money should the biopharmaceutical firm’s shares rally 1.85% over the current price of $5.89 to trade above the effective breakeven price of $6.00 by October expiration day. The investor walks away with maximum potential profits of $1.00 per contract if Arena’s shares surge 18.85% to exceed $7.00 by expiration. In the nearer-term September contract, another bullish player opted to sell 2,700 puts at the September $2.0 strike to take in an average premium of $0.30 per contract. The put seller keeps the premium received on the transaction as long as Arena’s shares trade above $2.00 through expiration day in September. Options implied volatility on ARNA is higher by 14.1% to 101.05% as of 2:55 pm (ET).

CQB - Chiquita Brands International, Inc. – Call buying on the international marketer and distributor of bananas and fresh produce continues today with shares of the underlying stock trading higher by 3.15% to stand at $13.10 as of 1:20 pm (ET). Bullish traders started to buy November $12.5 strike calls yesterday afternoon as Chiquita’s shares rallied nearly 5.5% to end Thursday afternoon at an intraday high of $12.72. The company’s shares continued their ascension today, inspiring investors to build up bullish stances on the stock ahead of the second-quarter earnings report next Thursday. Investors purchased approximately 3,000 calls at the November $12.5 strike by 1:25 pm (ET) for an average premium of $1.73 apiece. Call buyers make money if Chiquita’s shares increase another 8.6% to surpass the average breakeven point at $14.23 by November expiration. Traders buying the calls on Thursday have a clear first-mover advantage because they paid an average of $1.52 each for the November $12.5 strike calls, which is $0.21 less than today’s call coveters paid for the same contracts. The demand for call options on Chiquita Brands International lifted the overall reading of options implied volatility 4.7% to 56.28% just before 1:30 pm (ET).

Banks drive markets opening after Stress Test results

Europan Stocks opened today high, receiving well the positive results of Friday's Stress Test, but with no real euphoria. Banks lead the gains: Royal Bank of Scotland Group shares were up 2%, Lloyds gained 1.5% and BNP Paribas rose 2.5%, but the skepticism over the methodology of the tests could slow this initial sentiment down.

EUR keeps strong against the USD ending the week above 1.2900 but far from weekly highs that lie at 1.3028.

The results of the 2010 EU-Wide Stress Testing Exercise showed that 7 of the 91 banks tested failed the test, with a necessity of global EUR 3.5 billion extra capital in case of continuing crisis until end of 2011. In case of sovereign shock, the aggregate lost to the whole testing could be of EUR 67.2 billion.

According to the Committee of European Banking Supervisors and national authorities across the European Union, the seven banks that failed the test are Banca Civica, Unim, Espiga, Diada and Cajasur from Spain, ATEBAN from Greece and German HYPO. French, Portuguese, Italian, Finnish, Swedish and Belgium top banks all passed.

The US economy is not likely to slip back into recession

Sunrise Headlines

  • US Equities advanced on Friday as the European bank stress tests showed that 84 of 91 lenders had passed the examination, easing concerns about the health of the region’s financial system. This morning, most Asian shares start the week in positive territory.

  • On Friday, EU regulators said that only seven of 91 of the region’s systematically important banks failed the eagerly awaited stress test and would need to raise an additional €3.5 billion in capital, but some market experts were left sceptical that the tests were rigorous enough to restore confidence.

  • The US economy is not likely to slip back into recession but letting tax cuts for the wealthiest expire is necessary to show commitment to cutting budget deficits, US Treasury Secretary Geithner said yesterday.

  • European regulators have accused Germany and its banks of reneging on a deal to publish full details of sovereign debt holdings as part of the stress test exercise. Six of the fourteen German banks tested did not publish the expected detailed breakdown of sovereign debt holdings.

  • The UK economy grew almost twice as mush as expected in the second quarter, the fastest expansion for four years as rebounding services, manufacturing and construction ignited the recovery.

  • Japan’s government can’t continue to rely on excessive bond issuance to fund fiscal spending, the finance minister waned this morning, as the ruling Democratic Party officials wrangle over spending for the next fiscal year.

  • ECB policymakers increased pressure on Friday on industrialised countries to cut public spending immediately in order to consolidate the present recovery.

  • BP is poised to announce the departure of Tony Hayward, its chief executive, in the next 24 hours, according to people close to the company, the FT reports on its website.

  • Japanese export rose more than expected in June from a year earlier but the pace of increase slowed for the fourth straight month, a sign the economic recovery may lose steam.

  • Two top ratings agencies warned on Friday they might downgrade Hungary’s sovereign debt after its prime minister snubbed the IMF and rejected austerity measures in favour of a pro-growth policy.

  • Today, the eco calendar contains the US new home sales. Belgium and Germany will tap the market.


On Friday, the economic data in Europe continued to surprise on the upside of expectations. The German IFO indicator rose to its highest level in three years, confirming the improvement in the euro PMI’s. In the UK, GDP rose almost twice as fast as expected, due to a sharp pick-up in construction, but also the services and manufacturing sector enjoyed fast growth in the second quarter. GDP rose by 1.1% Q/Q, while a growth rate of 0.6% Q/Q was expected. The US eco calendar was empty.

On the markets, the strong European economic data didn’t go unnoticed, while investors were also waiting for the results of the stress tests that were published after the closure of European markets. This resulted in a further correction of global bonds, modestly higher equities, while commodities showed no firm direction. In the FX markets, the euro was little changed against the US dollar, but the dollar gained on the yen.

Intra-day, US Treasuries showed a very brief reaction on the release of the stress tests, but as equities ignored the results, US Treasuries rebounded to levels from before the release, only to drop later in the session when equities rebounded. The global bond markets were on the defensive on the back of excellent German IFO and UK GDP releases, which resulted in a down-move on the release itself. It was the second day in a row that global bonds corrected lower. While the stress tests were not published yet, we think that markets continued to look at them positively, which meant that risk aversion waned further. This was also reflected in the intra-EMU bond market, where spreads versus Germany across the board narrowed. Looking at a weekly perspective, the narrowing of the spreads versus Germany was especially an issue for Italian and Spanish bonds, much less for Portuguese, Greek or Irish spreads.

The European Bank stress tests delivered some surprising results. Indeed, only 7 banks, five Spanish saving banks, German Hypo Real Estate and the Greek Agriculture Bank failed and the global shortfall of capital is only €3.5B. In the US, the stress tests revealed that 11 of the 20 tested banks needed a combined €74.6B in fresh capital as a buffer for an adverse development of the banking environment. Some investment banks had done tests that revealed capital shortages of €38 to 85B. So, a number of analysts were quickly to dismiss the European stress tests as not severe enough. The critique understandably focussed on the absence of a default probability of sovereign debt in the banking books. The tests did take account of haircuts in the trading books, but about 90% of sovereign debt sits in the banking books and not the trading books. However, dismissing these tests on that argument would be unfair. The Bank Stress Tests were certainly tough enough with regard to all bank exposure (corporate, consumer, real estate) except the sovereign risk in the bank books, admittedly a big issue in bank balance sheets. The adverse scenario tales into account a double dip recession with negative growth figures both for 2010 and 2011 and declines in commercial and residential property prices, all adapted to the individual situation of the various countries. The stress tests also applied a tough interest rate shock that was more severe that the rise in rates in May. Short interest rates were upped 125 basis points to take account of a liquidity crisis and e.g. Spanish 5-year government yield was put at 5.78% in 2011, while the Greek one was 13.87%. This is a very severe shock that was applied to all bank exposure (except the sovereign risk in the banking books). The exercise resulted in a global loss of €566B over 2010-2011, or about €237B more than in the benchmark scenario, but except for the seven banks that failed the test, other banks have enough capital to face these losses. However, the main positive of the whole stress test may be the transparency and consistency. Everybody may now do its own exercise, also because the details of the sovereign debt exposure of individual banks are known (except for a small number of German banks that will come under suspicion of the market). This softens the criticism that the stress tests didn’t take sovereign default risk on the banking books into consideration. However, while one might eventually fear a default of the Greek government under some circumstances and eventually also some other smaller governments (as a catastrophic scenario), it would show that the overwhelming majority of banks could weather the storm. This means that the market may now start to discriminate between banks. Some banks that have passed the post may still be considered as risky and thus continue to have difficulties to get access to (money market) funding. However, the more general suspicion between banks may wane and thus there might be a normalisation of the money market workings. If this would be the case, the stress tests would have fulfilled their objective and a big obstacle to normalcy would have been taken away. However, the stress tests concerned the capital situation of banks. The longer term funding of banks remains a big issue for which the stress tests didn’t bring a solution. Banks will need to compete with governments that have still a big appetite for money to fund their deficits and refund their enormous debt pile. This might still restrain bank lending and cause banks to deleverage further. Overall, we think however that banking risk has diminished greatly after the stress tests. The ECB is still active on liquidity for months to come and in case of problems can still go further in providing liquidity. The Securities Market Program and the Covered Bond Program of the ECB, while on a low pace or stopped, are still available and a government backstop, the European Financial Stability Facility, is now operational. Concluding, one can always look for more negative scenarios, like most governments default, but these aren’t realistic and the risk test scenario looks a “realistic” risk scenario that most banks can cope with.

We will closely see how the Euribors and the liquidity premium on the money markets react, as well as European equities, the euro, the government bond yield spreads. Overall, we don’t expect any steep reactions in the various markets that have already anticipated a positive outcome. However, longer term it remains a positive that should underpin risky assets at the (small) price of core bonds.

Today, the eco calendar is thin as it only contains the US new home sales. On the supply front, Belgium (OLO March 2016 and Sep 2020 for €2-2.8B) and Germany (€4B Bubills) will tap the market. Belgium cheapened recently versus peers which might attract investors. Most investors will chew and react on the publication of the stress tests. Later this week, the EMU and US eco calendars are not too important expect for the M3 and EU confidence indications in EMU and the GDP and Chicago PMI in the US. More attention will go to supply in both EMU and US, albeit it in holiday- thinned markets.

After a dramatic drop of almost 33%, US new home sales are forecasted to show a slight rebound in June. The consensus is looking for a 6.7% M/M increase, but we believe a weaker outcome is not excluded. Later this week, the euro zone M3 money supply and credit growth data, euro zone CPI and the US Q2 GDP data will receive some attention. Last month, the euro zone lending data showed an increase in lending to non-financials, which might be a first indicator that lending to the private sector might be starting to pick up. It will be interesting to see whether lending to nonfinancials increases further in June, as it is an important factor for the recovery to gain strength. In the US, growth is expected to have slowed somewhat further in the second quarter (2.5% Q/Q from 2.7% Q/Q). We have no reasons to distance ourselves from the consensus, but a weaker outcome won’t go unnoticed as will raise fears for a double dip, especially in the US as UK GDP came out surprisingly strong last Friday.

Regarding bond market trading today, as expected the Bund correction continued at the European open (or at least the after-official trading dip on Friday was confirmed). We have long advocated that the Bund had slid in a sideways trading range between 129.93 and 127.60/12, but the Bund remained stuck near the top side of the range. On Friday, the Bund showed signs that it might test now the downside of the range and this might be the issue for this week. We stick to the view that dropping below that range would be difficult, but if the market would enthusiastically react on the stress tests (not our main expectation, see above) a sustained drop below would be a warning signal that a more pronounced correction is in store. Given the months long safe haven status of the Bund, such a deeper correction cannot be excluded though. For the US Treasuries, the situation is bit different. The Sep Note future is still in an uptrend (uptrendline is tested now) and key support is still further away, notably at 121-20+. For the US, one should take into account that the eco data have shown signs of weakness.

On Friday, the market talk was on the outcome of the stress tests for the European banking sector. As was already the case for quite some time, this was a debate between believers and non-believers. For the euro, one would expect this uncertainty to be a (slightly) negative factor. The pair started the session in the 1.29 area. However, after the very strong PMI’s on Thursday, markets also had to keep an eye on the German IFO indicator. As was the case for the PMI’s, the IFO was again much stronger than expected and just as was the case on Thursday, the UK data (Q2 GDP) were also much stronger than expected. This pushed EUR/USD to an intraday high at around 1.2965. However, the stress tests were too much of a factor of uncertainty. The euro had to return the early gains soon and a defensive repositioning hammered the single currency early in US trading with the pair testing bids just below the 1.2800 mark. The publication of the test results caused some temporary volatility with EUR/USD moving up and down between 1.2800 and 1.2900. However, looking at the (US) indicators of ‘stress’, investors at least came to the conclusion that the outcome of the test didn’t contain any unexpected negative news. Equities turned north and the VIX volatility indicator eased. Finally, EUR/USD closed the session at 1.2909, very close to the 1.2893 close on Thursday.

We made an assessment on the outcome of the stress tests elsewhere in this report. A lot of issues could have been addressed in a different way. However, for us, the bottom line is that the outcome of the stress tests should be a (moderately) positive factor for the European markets. So, while the immediate impact on the euro has been limited until now, we would consider it as mildly positive. At least, it removes an additional factor of uncertainty. From a market point of view, the question is now whether this factor will be enough a reason for a new up-leg in the euro. In this respect, we are still inclined to hold on to our view that the euro has already succeeded a nice rebound, admittedly from distressed levels. Nevertheless, the easing tensions on the intra-EMU government bond markets, the outcome of the stress tests and, last but not least, the strong eco data as published at the end of last week are all euro supportive factors. So, in a day-to-day perspective, we wouldn’t be surprised to see EUR/USD go for a (re)test of the 1.3029/95 resistance area. We stay open-minded, but don’t anticipate on a sustained break of this level yet. Today’s data (Chicago Fed and Dallas Fed indicators and the New homes sales) will probably have no lasting effect on trading.

Sterling had quite a good run on Friday. EUR/GBP was changing hands just above the 0.8400 mark at the start of trading in Europe. There was a brief up-tick after the publication of the strong IFO release in Germany. However, half an hour later, the UK Q2 GDP release came out much stronger than expected. EUR/GBP turned south. This move was both sterling strength in the wake of the strong GDP figures but it was also global euro weakness going into the publication of the results of the European stress tests. The pair dropping below Wednesday’s/Thursday’s lows even accelerated the move. The pair reached an intraday low at 0.8318 late in European trading. The publication of the stress tests results finally gave the euro some downside correction and EUR/GBP joined this move. The pair closed the session at 0.8372, compared to 0.8449 on Thursday.

Last Friday’s GDP data will make the debate at next week’s BoE meeting ever more interesting. Recently, it looked that the ‘Sentence’s view’ was only an outlier within the MPC and that the doves would maintain the lead. Even a further easing of policy was not ruled out yet. However, after Friday’s strong GDP data, the case of the doves hasn’t been strengthened. We expect the BoE to maintain a wait-and-see approach for now. So, we still don’t bet on the ‘Sentance’ camp gaining much more ground. So, in this context, we don’t see a reason for EUR/GBP to break out of its recent consolidation pattern anytime soon.

On Friday, there was again no big story to tell on USD/JPY trading. The pair moved gradually higher throughout the session. Trading was mostly driven by technical considerations. The dollar profited overall from some investor caution on the euro going into the publication of the stress tests. At the same time global sentiment on risk as mirrored in the equity markets’ performance wasn’t that bad. So, the pair finally managed to create somewhat of a buffer from the recent lows and closed the session at 87.46 from 86.95 on Thursday evening.

This morning, Asian equity markets are modestly higher. However, in line with the price action of late USD/JPY fails to draw much support from this. The downside in this pair is a bit better protected now (probably also as the market fears BOJ action in case of a drop to the 85.00 area). However, the pair obviously needs very high profile positive news to make any further progress. As we don’t see a trigger for such a news flow anytime soon, the recent stalemate in this pair might still continue for a while.