· Markets now await the ECB rate decision, where all analysts are currently expecting the board to keep rates unchanged at 1.00%.· UK Services PMI (Apr) M/M 53.3 vs. Exp. 54.2 (Prev. 55.3) – Lowest since November 2011.· France and Spain see smooth auctions. As such, European government 10-yr bond yield spreads are tighter against the German Bund.
European equities are trading higher at the midway point, with modest risk appetite observed ahead of the ECB rate decision and subsequent press conference. A large volume of corporate earnings has helped European stocks from the open, with the large cap names such as SocGen and BMW posting a strong set of results.
A smooth set of auctions from both Spain and France have helped tighten the European government 10-yr bond yield spreads against Germany. The French results saw a reduction in borrowing costs and solid demand across all lines, with the Spanish auction selling to the top of the indicative range, albeit with an increase in yields.
Elsewhere, Services PMI data from the UK has disappointed to the downside, however the figure still indicates growth in the services sector with the figure coming in at 53.3. A breakdown in the data has shown that clients do remain cautious, but optimism is on an upward trend.
Looking ahead in the session, market focus will be on Barcelona as ECB’s Draghi prepares for his press conference at 1330BST/0730CDT.
Chinese Non-manufacturing PMI (Apr) M/M 56.1 (Prev. 58.0) (Sources)
The PBOC may cut their RRR for banks in order to support the real economy as April new loans may have fallen by around 30%, according to unidentified sources. (Oriental Morning Post)
An IMF China representative has said China will not have a hard landing in the short term. The official added that China’s domestic consumption is more robust than originally thought and the concern is the next 5-10 years when the economy is rebalanced. (Sources)
Japanese Market Holiday – Constitution Day
US Challenger Job Cuts (Apr) Y/Y 40.559K vs. Prev. 37.9K (RTRS)
*EU and UK Headlines *
UK Services PMI (Apr) M/M 53.3 vs Exp. 54.2 (Prev. 55.3) - Lowest since November
Markit Research report that clients remained cautious, although firms' optimism rose to a two-year high and hiring picked up pace.
The EU have failed to reach a final deal on new capital rules after more than twelve hours of discussions, according to two EU sources. The EU will return to discuss a deal at the next meeting of EU finance ministers in mid-May. (Sources)
Britain’s relationship with Brussels erupted last night as UK Chancellor Osborne refused to defend watered down EU bank rules that would make him “look like an idiot”. When British demands to toughen up the text were rejected, Osborne accused the European Commission of offering concessions to French and German banks that breached the global agreement.
Officials close to the outgoing Greek premier Papademos have leaked a ‘to-do list’ for the yet-to-be-elected new Greek leader that contains 70 separate structural measures already agreed with the EU and the IMF. (FT-More) The list includes far-reaching reforms of the pension, justice and education systems, to be legislated together with a contentious new package of EUR 11.5bln in spending cuts due to be approved in June by the new parliament.
Spain is sounding out a group of investment banks to value the amount of provisions it needs to create a ‘bad bank’. According to sources with knowledge of the talks, Credit Suisse, Goldman Sachs and UBS are included in the discussions. (Cinco Dias)
BoE’s King said although inflation has fallen back in recent months it is still too high and despite efforts to stimulate the economy, the recovery is proving slower than hoped: the crisis is “far from over”. (BBC) The BoE Governor said that the biggest risks to banks at present stem from troubles in the Euro-zone, adding that it should have been made clear that a system had been built in which banks were too important to fail. King has said the UK is striking the balance on deficit reduction and has a credible plan. On rates, King commented that the UK needs low rates for the time being to provide support but the rate will rise to a more normal level at some point.
The UK Chancellor will struggle to meet his deficit-reduction targets over the next two years as the weak economy limits tax receipts and forces the government to borrow more, according to the CBI. (Sources) The CBI has revised its projection for the UK’s economic growth in 2012 to 0.6% from 0.9% in February. The CBI Director-General Cridland has said the BoE does not have a strong case to extend their QE program as the economy will rebound from its recession. Cridland said that despite recent knocks to UK growth the underlying trajectory of the economy remains the same.
European equities are trading in positive territory ahead of the US open with stocks being lifted from the open after a raft of positive earnings released pre-market. Risk appetite is modest, with the riskier stocks, including financials, outperforming.
In individual stocks news, French bank Societe Generale are trading higher after reporting a strong set of corporate earnings pre-market in Europe. SocGen have reported their Q1 net of EUR 732mln, beating the expectations of EUR 597.5mln. The company CEO has also commented that the bank does not need a capital increase, reassuring investors. Following the morning in Europe, SocGen shares trade higher by 1%.
Elsewhere on the earnings front, HeidelbergCement have disappointed shareholders in their earnings report, releasing a larger-than-expected loss of EUR 204mln, analysts were expecting a loss of EUR 133.8mln. Despite the disappointing losses, the company has confirmed its 2012 forecast, but shares still trade lower by 3.3%.
Top performing sectors in the BE500: Telecommunications (+1.48%), Financials (+1.30%), Utilities (+1.22%)
Worst performing sectors in the BE500: Technology (+0.30%), Basic Materials (+0.37%), Industrials (+0.65%)
EUR/USD was seen higher after the open in Europe, with short-term traders looking towards the expectations for a dovish ECB Conference from Draghi. The gains in the pair proved short-lived as the pair experienced selling at the highs and has now moved into negative territory. EUR/USD now trades in close proximity to an option expiry at 1.3150. The pair will be followed with close scrutiny after 1330BST/0730CDT as participants look for any dovish comments from the ECB chair Draghi.
USD/JPY is seen on an upward trajectory throughout the session, with support seen following S&P comments that Japan’s credit rating may be at risk should their public debt continue to rise. The pair is seen higher by just under 20 pips as the US come to market.
WTI and Brent crude futures are trading lower ahead of the NYMEX pit open following commentary from the OPEC head El-Badri, saying that OPEC are unhappy with current high prices and assured markets of plentiful supply.
*Oil & Gas News: *
• Enterprise Products Partners have said that two-thirds of the initial 150,00BPD capacity of the reversed Seaway pipeline has been committed. The pipeline will be the first to carry crude from the Cushing hub to refineries along the US Gulf coast, with flow beginning on May 17th.
• OPEC sees enough oil supply that will be more than sufficient to meet demand this year and beyond. OPEC’s El-Badri has said that the body wishes for USD 100/BBL and is unhappy with USD 110-130/BBL.
• The EIA has said US crude oil stocks are now at their highest levels since September 1990.
• The CME group are to raise futures margins for non-hedged accounts from May 7th in order to comply with new regulations. Members will be treated as speculators for outright positions and will pay a higher margin, according to the exchange.
• Saudi Arabia may cut premiums for their crude exports for sale to Asia for a second month due to falling demand. Saudi Arabian Oil Co. is posed to sell Arab Light for June at USD 1.75/BBL above benchmark Oman and Dubai oil, the lowest in three months.
• Bank of America have said Brent oil prices will likely continue, on average, above USD 100/BBL for the next five years.
*Geopolitical News: *
• World powers have called on Iran to urgently agree with the UN nuclear watchdog on access to their nuclear sites. World powers have commented that they expect the Iranian nuclear talks will lead to concrete steps towards a negotiated solution.
• The Saudi Crown Prince Abdul Aziz has described Iran’s attitude towards three occupied islands claimed by the UAE as unacceptable. Iran seized control of the three Gulf islands in 1971. The prince has pledged Saudi support to both the UAE and Bahrain on the issue.
• Western sanctions on Iran are negatively affecting the shipping market as Iranian supplies contain a vital blending component for shipping fuel, according to Barclays Capital.
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