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                                                                                                              7 July 2011

• The ECB raised its benchmark interest rate by 25 basis points to 1.50% as expected. Focus of the market now
  shifts to Trichet’s press-conference to gaze into the central bank’s future policy direction

• Moody's downgraded Portuguese banks' government guaranteed debt following their rating action on the
  country earlier this week

• The Irish/German 10-year government bond yield spread breached the 1000 BPS key level

• Well received bond auctions from Spain, allied with strong German industrial production data helped appetite
  for risk

• The BoE kept its benchmark interest rate and asset purchase target unchanged at 0.50% and GBP 200bln as
  expected

• RANsquawk EU Morning Briefing Video: http://www.youtube.com/watch?v=IeJBEHSh70A

Market Re-Cap
Moody's downgraded Portuguese banks' government guaranteed debt following their rating action on the country earlier
this week, which promoted risk-aversion and weighed upon the EUR as well as equities. European peripheral 10-year
government bond yield spreads generally widened, and the Irish/German spread breached the 1000 BPS key level.
However, as the session progressed, equities came off their earlier lows on the back of well-received bond auctions
from Spain, allied with higher than expected industrial production date from Germany. In other news, AUD received a
boost overnight following an unexpected rise in the employment change data from Australia. Elsewhere, the BoE kept
its benchmark interest rate and asset purchase target unchanged at 0.50% and GBP 200bln as expected.

Moving ahead, the focus of the market remains on the ECB's rate-decision, where the expectation is for a hike by 25
basis points to 1.50%, as well as Trichet's press-conference following the rate-decision to see the future policy direction
of the central bank. Also, jobless claims data from the US, allied with PMI and housing figures from Canada are also
scheduled for later in the session. In fixed income, there is 3-, 10-, and 30-year Note refunding announcement from the
US at 1600 BST.

Asia Headlines:

China inflation will likely drop to around 4% later this year or early next, but will remain in the 3%-5% range over the
next 5 to 10 years, according to a PBOC adviser, Li Daokui. Li brushed aside concerns that China faces risk of
stagflation, arguing that the country’s economic growth, which may reach 9.4%-9.5% this year and around 9% in 2012,
is anything but stagnant. Li said that China’s decision yesterday to raise benchmark interest rates was timely and would
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help curb stubbornly high inflation. (21 Century Business Herald)

US Headlines

A small team of US Treasury officials is discussing options to stave off default if Congress fails to raise the debt limit by
          nd
August 2 deadline, sources familiar with the matter said. The Treasury team is examining legal options to prioritise
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debt after August 2 , and have discussed whether 14 amendment of constitution allows the Treasury to ignore the
debt ceiling and keep borrowing, the source said. Treasury has also talked to the Fed about how Fed will be able to sell
Treasuries if the debt limit is not raised, however the Fed is not involved in contingency planning, according to the
source. Meanwhile, the US Treasury said that it sees no alternative to raising debt limit. (RTRS)

In other news, President Obama is pressing congressional leaders to consider a far-reaching debt-reduction plan that
would force Democrats to accept major changes to Social Security and Medicare in exchange for Republican support
for fresh tax revenue. At a meeting with top House and Senate leaders set for Thursday morning, Obama plans to argue
that a rare consensus has emerged about the size and scope of the nation’s budget problems and that policymakers
should seize the moment to take dramatic action. (Washington Post)

EU and UK Headlines:

Yesterday’s meeting of key participants in the Greek aid package ended in somewhat of a stalemate as no consensus
was reached on the modifications to the rollover plan. While the central idea is the French 30-year rollover, an
alternative rollover – also mentioned in the French proposal – would involve a five-year extension with a coupon of
5.5%. But the IIF is also keen to advance a third idea – encouraging buybacks of Greek debt. The buybacks could be
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                                                                                                             7 July 2011
funded out of EU/IMF aid money, advisers said, but there was also a push to encourage sovereign wealth funds in
Europe, the Middle East and Asia to co-invest alongside the IMF. It was “not unreasonable” to expect EUR 40bln–EUR
50bln to come from such sources, one negotiator said. (FT-More)

German Industrial Production SA (May) M/M 1.2% vs. Exp. 0.8% (Prev. -0.6%, Rev. to -0.8%)
German Industrial Production NSA WDA (May) Y/Y 7.6% vs. Exp. 7.0% (Prev. 9.6%, Rev. to 9.3%)
UK Industrial Production (May) M/M 0.9% vs. Exp. 1.1% (Prev. -1.7%); Highest since March 2010
UK Industrial Production (May) Y/Y -0.8% vs. Exp. -0.5% (Prev. -1.2%)
UK Manufacturing Production (May) M/M 1.8% vs. Exp. 1.0% (Prev. -1.5% Rev. to -1.6%); Highest since March 2010
UK Manufacturing Production (May) Y/Y 2.8% vs. Exp. 2.1% (Prev. 1.3% Rev. to 1.2%) (RTRS)

Spanish bond auction for EUR 1.5bln, 3.30% 31-Oct-2014, bid/cover 2.3 vs. Prev. 1.61 (yield 4.291% vs. Prev. 2.839%)
Spanish bond auction for EUR 1.497bln, 3.25% 30-Apr-2016, bid/cover 2.9 vs. Prev. 1.86 (yield 4.871% vs. Prev.
4.549%) (RTRS)

EQUITIES
European equities came under pressure in early trade after Moody's downgraded Portuguese banks' government
guaranteed debt following their rating action on the country earlier this week. However, as the session progressed,
equities came off their earlier lows on the back of well-received bond auctions from Spain, allied with higher than
expected industrial production date from Germany. Moving into the North American open, most European indices are
trading in positive territory, with technology and basic materials as best performing sectors.

 Index                 DAX              CAC             FTSE        EUROSTOXX             SMI

 Level                7468.06         3982.36          6029.98        2847.56           6212.99
 Change (ticks)        36.87           21.02            27.06           14.93            33.64


FX
EUR came under pressure after Moody's downgraded Portuguese banks' government guaranteed debt following their
rating action on the country earlier this week. However, losses were capped following well-received bond auctions from
Spain, as well as higher than expected industrial production data from Germany. In other news, AUD received a boost
overnight following an unexpected rise in the employment change data from Australia.

• Australia Employment Change (Jun) M/M 23.4K vs. Exp. 15.0K (Prev. 7.8K, Rev. to -0.5K)
• Australia Unemployment Rate (Jun) M/M 4.9% vs. Exp. 4.9% (Prev. 4.9%) (RTRS)

 Currency            EURUSD           GBPUSD          USDJPY
 Level                1.4282           1.5976           81.01
 Change (pips)        -0.0037         -0.0028          0.1000


COMMODITIES
WTI and Brent crude futures have traded without any firm direction during the European session as participants look
ahead to the DOE inventories data in the US session, however both still trade in positive territory following the bullish
API numbers last night.

Oil & Gas News
• Goldman Sachs said that they maintain their overweight recommendation for commodities on 3-, 6- and 12-month
  horizons, with the spread between WTI and Brent crude to narrow from current levels. They specifically recommended
  opening a long position on the Brent December 2012 contract, also reiterating their long position for Natural Gas.
• Morgan Stanley said they remained bullish on oil, particularly in the second half of the year, with inventory draws
  prompting OPEC to increase production. However they said they were bearish on Natural Gas due to robust
  production.
• The head of commodities research at Citi said that the WTI-Brent spread may widen to USD 40 by 2012 due to
  increased supply from western Canada and the US mid-continent.
• Iran’s OPEC governor said that the country is continuing to export oil to India despite receiving no payment in order to
  retain its market share; current estimates put the figured owed by India at USD 2bln. He added, that he saw oil prices
  fluctuating around the USD 100 level for the rest of the year.
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                                                                                                                           7 July 2011

Geopolitical News:
• Rebel fighters seized a village south of the Libyan capital and another group advanced towards Tripoli from the East
  in the biggest push in weeks towards Gaddafi’s main stronghold.

Other News:
• Goldman Sachs said it expects Gold prices to continue to climb in 2011 given the current low level of US real interest
  rates.

                                     OTC Spot
 Commodity         WTI Nymex           Gold
 Level                 97.28           1526.4
 Change (USD)          0.63             -2.50


LOOKING AHEAD
Economic Releases

    CDT         BST                                                   DATA                                           EXP            PREV
    0700        1300     US                        RBC Consumer Outlook Index M/M (Jul)                                              46.7
    0715        1315     US                          ADP Employment Change M/M (Jun)                                 70K             38K
    0730        1330     US                            Initial Jobless Claims W/W (Jul 2)                            420K           428K
    0730        1330     US                             Continuing Claims W/W (Jul 25)                              3700K           3702K
    0730        1330     CA                          New Housing Price Index M/M (May)                               0.2%            0.3%
    0730        1330     CA                          New Housing Price Index Y/Y (May)                               1.7%            1.9%
    0900        1500     UK                             NIESR GDP Estimate Q/Q (Jun)                                                 0.4%
    0900        1500     CA                                     Ivey PMI M/M (Jun)                                   67.5            69.1
    0900        1500     CA                                   Ivey PMI SA M/M (Jun)                                  62.0            65.5
    0930        1530     US                      EIA Natural Gas Storage Change W/W (Jul 1)                           81              78
    1000        1600     US                         DOE Crude Oil Inventories W/W (Jul 1)                          -2500K          -4375K
    1000        1600     US                         DOE Gasoline Inventories W/W (Jul 1)                              0K           -1428K
    1000        1600     US                          DOE Distillate Inventory W/W (Jul 1)                           800K            258K
    1000        1600     US                       DOE Cushing Crude Inventory W/W (Jul 1)                                           -542K
    1000        1600     US                          DOE Refinery Utilisation W/W (Jul 1)                           0.25%          -1.10%
    N/A         N/A      US                           ICSC Chain Store Sales Y/Y (Jun)                                               5.4%

                                                             Speakers
    0730        1330     EU                                       ECB’s Trichet Press Conference
    1130        1730     US                                      Fed’s Hoenig (Non-Voting Member)
    N/A         N/A      GE                                          Finance Minister Schaeuble
    N/A         N/A      EU                                                ECB’s Liikanen

                                                              Auction
    1000        1600     US                                 3y-, 10y- and 30y Note Refunding Announcement

                                                            Earnings
           US                   Gap (Sales), JC Penney (Sales), Kohl’s (Sales), Ross Stores (Sales), TJX (Sales), Target (Sales)



Prices taken at 1250BST

				
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