European Market Update

- The European indices are currently trading higher in the session led by the oil stocks as oil prices move back towards the $55 level.
- European government bonds are currently trading lower in the session weighed down by the results of a 30-year bund auction in which Germany sold €4.94B 4.25% bunds with an average yield of 4.11% and a bid-to-cover of 1.2. The bid-to-cover fell below the neutral call of 1.6 and the previous bid-to-cover of 1.5. Gilts were trading higher in the session but began to fall upon the release of the Bank of England minutes. In other bond news overnight Sweden sold SEK2.5B in 2012 bonds with an average yield of 3.915%; 4 out of 19 bids were accepted in the auction.
- After reaching its highest level since June of 2002 in December at 113.5, the Italian consumer confidence indicator fell to 110.3. The consumer confidence indicator remained above its five-year average of 109.9.
- Advanced fourth-quarter GDP, which was released in the UK overnight, rose to its highest level since the second-quarter of 2004 on a quarterly basis, and its highest level since third-quarter of 2004 on an annual basis, adding to the case for further interest rate hikes. Economic growth in the UK was largely led by the services sector.
- The Bank of England minutes from the January 11th meeting at which the Bank of England unexpectedly raised interest rates by 25bps to 5.25% showed that the vote to raise rates was a 5-4 vote. Many analysts expected a 7-2 vote. The Bank of England’s Bean, Blanchflower, Lomax, and Tucker were the dissenting voters, all voting to keep rates unchanged at 5.00%. In the Minutes the majority said that they did not see risks to inflation falling quickly, and said that the risk of a share slowdown from an interest rate hike was small. The dissenters expressed belief that inflation would fall during 2007.
- The German BDB Banks association left their 2007 growth forecast unchanged from their December view at 1.25-1.5%.
- Front month crude oil futures are currently trading lower in the session on little news after briefly reaching the $55.00 level during the Asian session.
 
- The European indices are currently trading in positive territory in the session led by the industrial and retail stocks as Siemans and Hennes & Mauritz reported strong earnings results.
- European government bonds are currently trading higher in the session after lower than expected IFO data was released in Germany, decreasing speculation that the ECB will have to raise rates within the coming months. The UK DMO sold £625M in 1.25% I/L Gilts due in 2055 overnight, with an average yield of 0.833% and a bid-to-cover of 2.42. Gilts, which spent most of the session in negative territory, were relatively unaffected by the results.
- German GFK consumer confidence for the month of February fell to a 12-month low at 4.8, below estimates of 8.4. Looking at the components, the sub-index measuring households’ willingness experienced its largest decline since 1980, falling 65 points to –5.1. Consumer confidence fell on growing concern that higher taxes will reduce household income. A Germany consumer group cited the VAT hike as the reason for the decline in confidence despite unemployment levels near four year lows.
- The French business confidence indicator for the month of January came in at 106, in line with expectations, while the production outlook fell to –2, and the own-company production outlook rose to 14. Business confidence was unchanged at 106 on concerns that a slump in manufacturing would continue into 2007.
- Danish unemployment rate dropped to 3.9% for the month of December, the lowest level since 1974. The drop in unemployment increases speculation that a labor shortage will boost wages and inflation as labor demand surges amid the highest level of consumer spending growth in over 10 years.
- The German IFO business climate fell to 107.9 from its all time high of 108.7 last month, while the current assessment fell from its second highest level on record to 112.8. Conversely, expectations rose to 103.2 from 103 in December. IFO’s Nerb said that the VAT hike may have contributed to the decline in the IFO index. Nerb continued saying that expectations are good for exports, but not as good as last month, and followed by saying that the rise in the expectations index suggests that a cyclical recovery will continue after a brief pause. Nerb also said that he sees certain threats from wage demands, and ended by saying that the ECB should wait for more data as it is too early to raise rates again.
- At Davos, the president of the Asian Development Bank said that Yen weakness from the carry trade has gone too far. Kuroda followed saying that he sees the carry trade unwinding within two years. Furthermore Kuroda said that he does not see any reason for the BOJ to raise rates at the February meeting.
- Shortly after comments from the ADB’s Kuroda, Japan’s Watanabe said that there is no plan to discuss Yen weakness at the G7 meeting. Watanabe said that someone may say that the Yen is weak, and believe that Germany may bring up issues of capital flows.
- The Bundesbank’s Zeitler said overnight that long-term inflation expectations in Germany and the Euro-Zone are around 1.9%, noting ECB policy will keep prices anchored. Zeitler continued saying that moderate wages are the key to growth in Germany.
- In a relatively quiet session on the energy front crude oil futures are currently trading around the unchanged level after spending majority of the session in negative territory.
 
- The European indices are currently under water and have been so since the open as declining metal prices dragged down the mining stocks, and mixed earnings results were unable to generate any upward momentum.
- European government bonds are currently trading in negative territory in the session, and are currently off of their worst levels. Interest rate futures ticked down upon the release of much stronger than anticipated M3 growth in the Euro-Zone, but climbed back towards session highs soon thereafter. Gilts have been relatively quiet in the UK and currently sit in negative territory. Italy sold €2.0B in two-year zero-coupon bonds overnight, with an average yield of 3.918%, and a bid-to-cover of 1.74.
- Spanish unemployment rose during the fourth-quarter as slower consumer spending weighed on economic growth. The unemployment rate rose to 8.3% from 8.15% in Q3.
- The German Import Price index for the month of December fell to its lowest level since May of 2005 on an annual basis as oil prices declined. Despite the drop in December, for the full year 2006, import prices rose 5.2%, their largest gain since 2000.
- M3 money supply rose to its fastest pace in nearly 17 years during the month of December, as M3 reached 9.7% y/y, above estimates of 9.2%. The stronger than expected money supply further supports the case for an ECB interest rate hike as central bankers see M3 as a gauge for future inflation. Dan Brown, chief European economist at Bear Stearns, said of the M3 data that the acceleration in M3 money supply growth above 9.7% more is more than double the ECB’s 4.5% reference target rate, increasing the risk of an earlier than expected interest rate hike. Markets currently anticipate that the ECB may raise interest rates as soon as March.
- BBA mortgage lending in the UK fell to £18.2B in December from the record of £21.4B reached during the month of November, while mortgage approvals were 45,533, down 42% from the 78,726 reached during November. Despite the slowdown in December, according to the BBA, the mortgage market grew by a greater rate during the fourth-quarter of 2006 than the comparable period of 2005.
- On the commodity front crude oil futures currently trade in positive territory on little news. Crude currently sits between the $54 and $55 handles. Metals are currently trading lower with the exception of silver, which is trading just above the unchanged level.
 
- After a negative open the European indices are currently trading in positive territory as higher oil and copper prices push up the energy and mining stocks.
- European government bonds are currently trading lower in the session on increasing speculation that the ECB will have to raise interest rates in order to curb inflation in the coming months. Similarly in the UK gilts are currently trading lower on increasing speculation that the BOE will have to raise rates in the coming months for the same reason after some comments from the BOE's Blanchflower this weekend. The Norwegian central bank sold NOK4B in 2-year 5.50% bonds with an average yield of 4.63% and a bid-to-cover of 2.46. Italy sold €1.25B in 10-Year I/L bonds overnight with an average yield of 2.1%, and a bid-to-cover of 1.74.
- In a relatively quiet session Italian business confidence for the month of January fell to an 11-month low as manufacturers plan to reduce production during the coming months.
- A member of the German labor office commented overnight saying that the rise in unemployment during January could be smaller than normal. German unemployment, which is expected to show an unemployment change of -40K, and an unemployment rate of 9.7%, is data is due out this Wednesday. An unemployment rate of 9.7% would be the lowest since May of 2002.
- Comments from an interview with the ECB's Liebscher were published overnight. Liebscher said that 2007 growth may be above potential, reiterating that risks are seen on the upside ad that the ECB expects robust growth in 2007.
- The IMF's Lipsky commented overnight saying that central bankers must watch for any reacceleration in inflation. Lipsky also said that recent data in the US is better, noting that the US housing market will dampen GDP growth in coming quarters.
- Ahead of tomorrow's housing data in the UK the Sunday Express ran an article forecasting that the UK housing market will show a huge slowdown. Similarly, the FT ran an article noting that, according to new data, the commercial property boom in the -UK has ended. Nationwide house prices, which, on an annual basis, are expected to drop from December's 22-month high of 10.5% to 10.0%, are due out of the UK at 2:00 ET during tomorrow's session.
- The US Dollar reached a new 4-year high against the Japanese Yen on follow through from the Asian session where investors were disappointed with Japanese retail sales data.
- Front month crude oil futures are currently trading slightly lower in the session on little news. Metals futures are trading lower as well.
 
- The European indices are currently trading in negative territory in the session weighed down by the mining and energy stocks on speculation that some of the largest of the mining and energy companies will report less than favorable results after recent commodity price declines.
- European government bonds are currently trading higher after German state CPI data showed that inflation fell in January compared to December. In the UK gilts are trading higher as housing data fell from its most inflationary levels since mid-2005. Italy sold €2.0B in 3-year bonds with and average yield of 3.93% overnight with a bid-to-cover of 1.61. Italy also sold €2.0B in 7-year floating rate notes with an average yield of 3.91%, and €3.5B in 10-Year 4.0% bonds with an average yield of 4.29%, and a bid-to-cover of 1.33.
- Nationwide house prices fell to an eight-month low in the UK suggesting that the three interest rate hikes occurring over the past six months have began to cool down the UK property market. This is the third report suggesting that house-price inflation has began to slow down after reaching levels that weren't seen since early 2005. The average price of a house in January was £173,225 +0.3% from December, and +9.3% from January of 2006.
- In other housing related news in the UK mortgage approvals fell to 113K during the month of December, their lowest level in eight months, adding support to the belief that the UK housing market has began to slow. Net lending secured on dwellings rose to £10.6B to reach its highest level on record.
- France's quarterly manufacturing survey was released overnight showing that demand outlook fell to 6 during the first-quarter from 13 during the fourth-quarter, while foreign demand outlook fell to 12 from 19.
French housing permits fell to their lowest level since August of 2001 during the month of December, while housing starts fell to their second lowest level on record since July of 2003.
- Swedish retail sales reached their highest level since June of 2005 during the month of December at 2.5%, well above estimates of 0.9%. Retail sales jumped as unemployment dropped its lowest level since May of 2003 during the month of November, while income rose. During the full year 2006 Swedish retail sales rose 7.4%, the highest since records began in 1990.
- Swiss National Bank's Gaillard said overnight that he does not see any threat from inflation right now. Gaillard followed saying that he doesn't see any reason for the SNB to stop normalizing rates, and concluded saying that the drop in the Swiss Franc is not a problem while prices remain in check. Note that Gaillard is not a voting member of the Swiss monetary policy committee. The Euro reached an 8-year high against the Swiss Franc earlier in the session at 1.6250.
- German CPI for the states of Saxony, Brandenburg, Hesse, and North Rhine-Westphalia rose on an annual basis, with Hesse recording its highest y/y change in one year. On a monthly basis CPI figures fell from December reaching levels at or below their five-year averages. Annual inflation rates accelerated after an increase in the German VAT tax boosted energy prices and services.
- The French Prime Minister De Villepin forecasted that unemployment would fall to 8.0% during 2007, from the 8.7% level in 2006.
- Front month crude oil futures are currently trading in positive territory in the session on little news. British Petroleum announced an oil discover in block 31 off of Angola. BP expects the well to produce 5,000 barrels per day.
 
- The European indices are trading lower in today’s session weighed down by earnings results that failed to impress investors, along with a serious of downgrades on some major index components.
- European government bonds opened higher today and have remained in a relatively tight range since the open. EGBs were relatively unaffected by the results of the German unemployment data as well as the Euro-Zone CPI estimate. In the UK gilts are trading slightly higher and were relatively unaffected by the better than expected GfK Consumer confidence.
- German retail sales rose 2.5% in December, the most since June of 2004 as consumer spent ahead of the implementation of the VAT hike in January.
- As usual, the German unemployment data was leaked early overnight showing a jobless change of –106K, much greater than the –40K expected. The unemployment rate fell to 9.5% on accelerating economic growth; the unemployment rate fell to its lowest level since April of 2002. The ILO unemployment rate fell to its lowest level since records began in 2004; the ILO unemployment rate was in line with expectations at 7.6%. The head of the German Labor Agency Wiese said that he sees employment growth broadening. Wiese said that full-time jobs increased by 400K during 2006, and predicted that the trend will continue into 2007.
- The Euro-Zone CPI estimate for the month of January came in at 1.9%, below estimates of 2.1%, maintaining position below the 2.0% inflation limit for the fifth consecutive month. A decline in oil prices helped to offset the German VAT hike, which has, thus far, had a much smaller than anticipated impact on the German economy. The Euro-Zone unemployment rate fell to its lowest level since records began in January of 1993 at 9.5%.
- GfK consumer confidence came in ahead of expectations at –7 in the UK, above estimates of –9. The GfK said that the better than expected consumer confidence is “just a blip,” noting that the number is more about the satisfactions of bargain hunting than consumer resilience after the surprise interest rate hike in January.
- The German government official boosted its GDP growth forecast for 2007 to 1.7% from 1.4% as expected. The government also forecasted export growth of 7.9% and import growth of 6.8% in 2007. The German government also said that there are risks of significant FX adjustments in 2007.
- Front month crude oil futures are currently trading lower in the session, giving up gains made during the US session yesterday on little news. S&P made a single comment regarding energy overnight; S&P said that the outlook for the European oil and gas industry is solid for 2007.
 
- The European indices are currently trading sharply higher in the session after some positive earnings reports were released ahead of the open. The German DAX reached its highest level since November of 2000, hitting the 6844.77 level.
- European government bonds are currently trading higher in the session on little news. Over in the UK gilts are currently trading lower after comments from the DMO/GEMMS meeting were released along with great than expected PMI data. GEMMS called for issuance sewed to the long and I/L gilt in 2007/2008, recommending the build up of 5 and 10-year benchmarks. GEMMS also expressed concern over low I/L liquidity. Total financing requirements are seen around £64B in 2007/2008. In other bond related news Spain sold €1.41B in 3-Year bonds with an average yield of 3.951% and a bid-to-cover of 2.58. France sold €2.78B in 3.75% 2017 bonds with an average yield of 4.12% and a bid-to-cover of 2.83, €1.49B in 4% 2038 bonds with an average yield of 4.24% and a bid-to-cover of 3.15, and €1.22B in 4% 2055 bonds with an average yield of 4.19% and a bid-to-cover of 2.53. overnight as well.
- Manufacturing PMI data showed that European manufacturing growth slowed during the month of January as the demand for exports declined. With the exception of data in the UK, all PMI figures fell below estimates, and declined from the prior month. In the UK PMI came in ahead of estimates at 52.8, signaling that manufacturing growth is adding to strong economic growth.
- The Swiss trade balance for the month of December was lower than the expected surplus of CHF800M at CHF430M. For the full year 2006 Swiss exports experienced their largest gain in 26 years resulting from faster economic growth and a weaker Franc. Swiss exports rose 9.1% in 2006, widening the trade surplus to CHF11.7B in 2006.
- In a quiet night on the energy front, crude oil futures are currently trading lower. Crude oil fell from its recent four-week high as investors speculated that stockpiles in the US are sufficient to meet demand for the remainder of the winter.
 
- The European indices are currently trading modestly higher in the session after a series of earnings were released ahead of the open today. The biggest mover today was Sainsbury, which rose as much as 17% after Blackstone confirmed that it was in the preliminary stages of assessing the company for a possible takeover bid.
- European government bonds are currently trading lower in the session on technical factors as the session has been void of speakers, auctions, and economic numbers with the exception of the rather dry PPI data in the Euro-Zone. In the UK gilts are currently trading higher on the short end, but lower on the long end after stronger than expected construction PMI.
- Spanish unemployment rose at its fastest rate in 11-months in January. The number of unemployed rose 59.6K from December as hiring slowed. Although unemployment rose from December, unemployment fell 4% compared to January of 2006.
- Construction unexpectedly rose in the UK according to the Construction PMI which came in at 57.9 compared with December’s 57.5 and analyst estimates of 57.0. The growth in construction, which represents 6% of the economy, and manufacturing, which we saw yesterday, seems to be in line with the BOE’s prediction that expansion would accelerate during the first half.
- Euro-Zone PPI for the month of December was in line with expectation at 0.0% m/m and 4.1% y/y. Excluding the energy sector PPI rose 0.1% m/m.
- In an all around quiet session front month crude oil futures are currently trading in positive territory well above the $57 handle. On the commodity front spot gold, front month silver futures and front month copper futures are all trading in negative territory.
 
- The European indices are currently trading mixed after a negative open. European auto stocks fell led by France’s Faurecia after poor earnings, and France’s Renault after traders in the Asian market sold shares of Nissan following the company’s poor earnings report released after the Asian close on Friday.
- European government bonds are currently trading higher in the session on little news. Pimco’s Katz said in an interview overnight that the momentum seen in the Euro area’s economy at the beginning of 2007 will not lend support to bond markets. Katz continued noting that, thus far, inflation data has been the single positive factor for European bond markets in 2007, but maintained the view that macro economic indicators will not provide much support for the bond markets. In the UK gilts are trading higher after the release of a lower than expected services PMI figure.
- After lower than expected manufacturing PMI figures last week, services PMI figures were ahead of expectations in the Euro area led by companies’ expectations for new business. Despite the rise in services PMI data many analysts see the Euro area economy slowing down during 2007.
- Contrary to the rise in services PMI data in the Euro area, services PMI fell to 59.2 in the UK from 60.6 in December. Services PMI fell from a 10-year high last month as the effects of the last three BOE interest rate hikes began to weigh in.
- Swedish Central Banker Rosenberg said overnight that there is no need to speed up rate hikes. Rosenberg said that rates will rise in line with December’s expectations. Rosenberg continued noting that inflation expectations will be held down, and finished saying that the Swedish economy is performing better than expected.
- The German DIHK research institute forecasted first-quarter GDP growth of 0.5%, and said that the government’s forecast of 1.7% for the full year is “very realistic”. The DIHK noted that the ECB must be vigilant on any further Euro rise as it could hurt exporters. The DIHK also urged that the ECB keep interest rates on hold at the moment.
The Qatari Oil Minister said overnight that OPEC has not yet made any decisions regarding further output reductions. The oil minister said that oil markets have stabilized, and noted that OPEC plans to watch markets until the March meeting. The New York Times ran an article overnight suggesting that equipment and services stocks in the oil industry may represent a good value, according to some analysts, but noted that investors may be in for a “wild ride”. According to Jeff Tillery, an analyst at Pickering Energy Partners, Schlumberger, Baker Hughes, and Transocean are examples of good buys. Further along Russel Kinnel, the director of mutual fund analysis at Morningstar, highlighted PowerShares Dynamic Oil and Gas Services Portfolio and State Street’s SPDR Oil and Gas Equipment and Services as low-cost choices for investors interested in exchange-traded funds, but cautioned that focusing on a narrow sub-sector such as the oil field services sector could be more volatile than sector funds that focus on the entire energy industry. Front month crude futures are currently trading lower in the session, but remain well above the $58 handle.
 
- In an extremely quiet night the European indices are currently trading in positive territory in the session led by the financial sector. European stocks are trading near six-year highs after the FED signaled that the US economy has continued to expand without showing signs of inflation. The FTSE 100 pushed to a new a new six-year high overnight led higher by the banking and retail sectors.
- European government bonds are currently trading relatively flat in the session. The German government announced that it will be selling an additional €6B in 3.75% 10-year bonds on February 14. In the UK gilts opened slightly lower, but quickly shot into positive territory as the BRC’s retail sales figures were taken into consideration.
expected Gilts are now drifting back towards unchanged levels.
- German factory orders were lower than expected after demand for consumer products dropped. The weaker than expected factory orders is a sign that maybe the German VAT hike had more of an impact that initially believed.
- BRC retail sales reached their highest level in three years on a m/m basis, while total sales reached a five month high on momentum that built up in December. According to one analyst at the BRC these retail sales figures are a sign that the previous three interest rate hikes have not done enough to curb inflation in the UK, boosting the chance of another interest rate hike in the coming months.
- Euro-Zone retail sales for the month of December fell below expectations. Despite the fact that retail sales fell below estimates in the Euro area, the y/y figure rose to 2.1% from 1.3% in November. The sharpest drop in retail sales was seen in Belgium; Belgian retail sales drop to –3.9% y/y from +1.8% y/y in November.
- The EU’s Almunia said overnight that he cannot anticipate whether or not G7 will issue a statement on currencies. Almunia said that the VAT impact on inflation and GDP is less than expected.
- With little news on the energy front, crude oil continues to push towards the $60 handle after the National Weather Service forecasted during the US session that below average temperatures in the Northeast will last until around February 18.
 
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