EU Market Update: Major European PMI Manufacturing data misses expectations; German IFO Business Confidence falls for the first time in 7 months


Economic Data

- (RU) Russia Gold & Forex Reserve w/e May 18th: $514.3B v $518.8B prior

- (DE) Germany Q1 Final GDP Q/Q: 0.5% v 0.5%e; Y/Y: 1.7% v 1.7%e; GDP WDA Y/Y: 1.2% v 1.2%e

- (DE) Germany Q1 Private Consumption: 0.4% v 0.2%e; Government Spending: 0.2% v 0.3%e; Domestic Demand: -0.3% v 0.0%e; Capital Investment: -1.1% v -0.3%e; Construction Investment: -1.3% v -0.4%e; Exports: 1.7% v 0.9%e; Imports: 0.0% v 0.3%e

- (CH) Swiss Apr Trade Balance (CHG): 1.3B v 1.9Be; Real Exports M/M: -0.9% v +0.2%e; Real Imports M/M: 2.6% v 5.9% prior

- (FI) Finland Apr PPI M/M: -0.1% v +0.4% prior; Y/Y: 1.4% v 1.4% prior

- (FI) Finland Apr Preliminary Retail Sales Volume Y/Y: -2.0% v +5.3% prior

- (FR) France May Business Confidence: 93 v 94e; Production Outlook: -29 v -14 prior; Own-Company Production Outlook: -4 v -4 prior

- (FR) France May Preliminary PMI Manufacturing: 44.4 v 47.0e; PMI Services: 45.2 v 45.7e

- (CZ) Czech May Business Confidence: 6.0 v 7.5 prior; Consumer Confidence: -31.0 v -29.3 prior; Composite: -1.4 v +0.2 prior

- (HU) Hungary Mar Retail Trade Y/Y: +0.9% v -0.8%e

- (ES) Spain Mar Mortgages-capital loaned Y/Y: -41.5% v -49.6% prior; Mortgages on Houses Y/Y: -42.0 v -47.1% prior

- (DE) Germany May Advanced PMI Manufacturing: 45.0 v 47.0e (fastest rate of contraction since June 2009); PMI Services: 52.2 v 52.0e

- (NL) Netherlands Apr Unemployment Rate: 6.2 v 5.9% prior

- (NL) Netherlands May Producer Confidence: -5.0 v -3.3 prior

- (EU) Euro Zone May Advanced PMI Manufacturing: 45.0 v 46.0e (lowest reading since June 2009); PMI Services: 46.5 v 46.7e; PMI Composite: 45.9 v 46.6e

- (DE) Germany May IFO Business Climate: 106.9 v 109.4e (first MoM decline in 7 months); Current Assessment: 113.3 v 117.1e; Expectations Survey: 100.9 v 102.0e

- (UK) Q1 Preliminary GDP (Second reading) Q/Q: -0.3% v -0.2%e; Y/Y: -0.1% v 0.0%e

- (UK) Q1 Preliminary Private Consumption: 0.1% v 0.3%e; Government Spending: 1.6% v 0.0%e; Gross Fixed Capital Formation: -0.3% v -0.5%e; Exports: +0.1% v -0.3%e; Imports: 0.4% v 0.1%e

- (UK) Q1 Preliminary Total Business Investment Q/Q: +3.6% v -1.0%e; Y/Y: 14.2% v 9.2%e

- (UK) Mar Index of Services M/M: 0.5% v 0.3%e; 3M/3M: 0.1% v 0.2%e

- (UK) Apr BBA Loans for House Purchase: 32.4K v 32.0Ke

- (HK) Hong Kong Apr Trade Balance (HKD): -42.9B v -40.8Be; Exports Y/Y: 5.6% v 6.2%e; Imports Y/Y: 5.0% v 4.1%e

- (IC) Iceland May CPI M/M: 0.0% v 0.8% prior; Y/Y: 5.4% v 6.4% prior

Fixed Income

- (DK) Denmark sold approx DKK6.0B in I/L 2023 Bonds; Yield -0.14%, bid-to-cover: 1.78x

- (HU) Hungary Debt Agency (AKK) sold HUF50B v HUF45B indicated in 12-Month Bills; Avg yield 7.58% v 7.38% prior; Bid-to-cover: 1.81x v 2.12x prior


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Notes/Observations

- China May HSBC Flash Manufacturing PMI registers its 7th consecutive contraction

- Major European PMI Manufacturing miss market expectations

- German IFO falls for the first time in 7 months

- UK Q1 GDP second reading revised slightly lower

- Speculation rising of a EU wide deposit guarantee plan to be endorsed by German Chancellor Merkel

- EU growth initiatives will be announced in June, but without abandoning fiscal prudence


Equities

Indices: FTSE 100 +0.80% at 5306, DAX +0.30% at 6301, CAC-40 +0.60% at 3021, IBEX-35 +0.60% at 6481, FTSE MIB +0.75% at 13,057, SMI +0.40% at 5841

- In Europe, equities opened the session broadly higher amid gains in banks. However, markets have since pared gains following the release of weaker than expected EU manufacturing PMI and German IFO data. Additionally, the decline in China's May flash manufacturing PMI has weighed on markets. In terms of upcoming event risks, durable goods and weekly jobless claims data are due out of the US later today. Also, commentary is expected later today from the German Finance Minister Schaeuble, ECB's Prsident Draghi, Fed official Dudley and ECB/Bundesbank official Asmussen.

- In the UK shares of Mothercare [MTC.UK] and Cable & Wireless Communications [CWC.UK] have both traded sharply higher after releasing their respective full year earnings reports. Additionally, Thomas Cook [TCG.UK] has gained more than 5%, after naming a new CEO. SABMiller [SAB.UK] has moved between slight gains and losses, following the release of its full year earnings report. In Spain, Bankia is trading lower by approx. 1%, as Spain's government said the firm will require about €7.1B to comply with the country's provisioning rules. Austrian bank, Raiffeisen [RIBH.AT] has gained over 1% after reporting higher than expected Q1 earnings. In Germany, sharers of SAP [SAP.DE] and Metro [MEO.DE] have been weighed down by ex-dividend factors. Bayer [BAYN.DE] has lost approx. 1.5%, as a US FDA panel voted against recommending XARELTO as a treatment for acute coronary syndrome.

Speakers:

- German IFO Economists commented that uncertainty in Euro Zone was impacting Germany's economy, but outlook remained above its long-term avg

- Bank of Japan (BOJ) Monthly Economic Report maintained its overall assessment of the economy that it would return to moderate recovery path

- Japan BOJ Gov Shirakawa commented ion Parliament that distrust in fiscal reform could push up long-term interest rates and weigh upon earnings of financial companies. He reiterated view that BOJ would pursue powerful easing. Risk aversion was the biggest factor in recent FX price movements. He added that there was no clear correlation historically between monetary base and JPY currency movement. The BOJ would strive to beat deflation using current asset buying program

- IMF China representative stated that a Greek exit from EMU would be a big shock to Chinese exports but China has fiscal room to sustain growth in the face of crisis

- BoE official Bailey stated that the UK banking sector's contingency plan for potential Greek exit from euro becoming more detailed

- Finland Fin Min Urpilainen commented that Europe's challenge was to find economic growth. Collateral payment from Greece rose to €560M

- Ireland Dep PM Gilmore stated that categorically treaty would not be changed and reiterated the view that it wanted Greece to stay inside the EMU. Lastly he added that Ireland did not have contingency plan for a Greek exit.

- Sweden FSA's Cerps stated that the agency was monitoring banking sector to USD funding as Euro crisis deepens

- Poland Dep Fin Min Radziwill commented that the PLN currency was relatively stable with its weakness related to the Euro crisis. Poland currency sales would be similar to 2011 levels. He noted that debt markets were difficult at this time but would return to the market after it stabilizes as the country is in a comfortable situation. Domestic sales were seen covering most remaining needs for 2012

- Hong Kong Chief Executive Leung stated that it would seek stronger economic growth by diversification

- India Finance Ministry Official noted that the Gov't committee to meet on Friday to discuss raising diesel prices

- Philippines Central Bank Assistant Gov Amador commented that it would review CPI forecasts at June policy meeting and saw Inflation at a manageable as lower oil costs dampened pressures. To consider global economy and Euro Zone crisis during policy meeting and added the central bank would moderate sharp volatility in FX rates

- Indonesia Finance Ministry unveiled its mineral export tax regulation

- Iran official stated that there was no basis for new round of UN Counsel (P5+1) discussions

Currencies:

- The Euro initially tried to correct oversold levels but risk aversion sentiment again maintained the upper hand throughout the bulk of the European morning. Following China's lead, the European major PMI Manufacturing data came in softer than expectations and provided further headwinds for the Euro. Citigroup analyst added to sentiment when it issued a note forecasting ECB refi rate being cut to 0.50% and the central bank to resume its 3-year lending LTRO following any Greek exit from EMU. The EUR/USD approached the 1.2500 level for 22-month lows which provided some technical and psychological support. One analyst noted that 1.2530 level was 78.6% retracement of its 2010-2011 move.

-The hour ahead of the NY morning the markets encountered a bit of a reversal as European equity markets moved back into positive territory and peripheral spreads narrowed. The record low yields of safe-haven plays seemed to have ignited some asset reallocation back into equities. The EUR/USD was back around the 1.2560 area as the NY morning approached

- The EUR/CHF cross floor at 1.200 continued to note a 'massive' bid in its defense.

Political/ In the Papers:

- The Spanish government was said to be planning to nationalize CatalunyaCaixa and NovaGalicia banks due to the inability to find a buyer. Prior reports from late March suggested that the auction process for the banks would be slowed by Spain's government, as Spain's Deposit Guarantee Fund (DGF) needed to be strengthened. At that time it was estimated that the DGF had about €2.0B in funds.

- Plans by the government to delay certain privatizations related to the energy industry have weighed on Russia's equity markets. On Wednesday, Russia's benchmark RTS index declined by 4.4%.

- The Telegraph's Ambrose Evans-Pritchard is critical of former Greek caretaker PM Papademos. He argued If Greece were to leave the Euro, then its fate would not have to be as dire as the situation recently described by Papademos. It could restructure its economy in a similar manner to Iceland.

- According to the FT US manufacturers argued against plans by JP Morgan to launch an exchange traded fund backed by copper as it would grossly and artificially inflate prices, and cause wreak havoc on the global economy.


Looking Ahead

- (ZA) South Africa Central Bank (SARB) Interest Rate Decision:

- (AR Argentina May Consumer Confidence:

- 6:00 (IR) Ireland Apr Property Prices M/M: No est v 0.0% prior; Y/Y: No est v -16.2%e

- 6:00 (CZ) Czech Republic to sell 9-month Bills

- 7:15 (UK) BOE member Miles

- 7:30 (DE) German Fin Min Schaeuble

- 7:30 (TR) Turkey May Industrial Confidence: No est v 116 prior; Capacity Utilization: No est v 74.7% prior

- 8:00 (ZA) South Africa Central Bank Gov Marcus press conference

- 8:00 (BR) Brazil Apr Unemployment Rate: 6.2%e v 6.2% prior

- 8:00 (RO) Romania to sell RON500M in Bonds

- 8:30 (US) Apr Durable Goods Orders: +0.2%e v -4.0% prior (revised from -4.20%); Durables Ex Transportation: +0.8%e v -0.8% prior (revised from -1.1%); Capital Goods Orders Non-defense Ex-Aircraft: 0.8%e v

-0.8% prior; Capital Goods Shipment Non-defense Ex-Aircraft: -1.0%e v +2.6% prior

- 8:30 (US) Initial Jobless Claims: 370Ke v 370K prior; Continuing Claims: 3.250Me v 3.265M prior

- 8:58 (US) May Preliminary Markit PMI:

- 9:00 (IT) Italy PM Monti

- 9:00 (EU) ECB's Draghi, Bank of Italy's Visco speak at Rome Conference

- 9:00 (DE) German Chancellor Merkel speaks at German Engineering Industry Convention

- 9:00 (BE) Belgium May Business Confidence: -11e v -10.7 prior

- 9:00 (MX) Mexico Q1 GDP Y/Y: No est v 11.0% prior

- 9:30 (DE) Germany Econ Min Roesler

- 9:30 (US) Fed's Dudley to speak on Regional Economy in New York

- 9:30 (EU) EFSF CFO Frankel in Rome

- 9:30 (BR) Brazil Apr Current Account: -$4.0Be v -$3.3B prior; Foreign Direct Investment (FDI): $4.9Be v $5.9B prior

- 9:30 (US) Commercial Paper data

- 10:30 (US) EIA Natural Gas Inventories

- 11:00 (US) May Kansas City Fed Manufacturing Activity: 5 v 3 prior

- 12:20 (DE) ECB member Asmussen in Poland

- 15:00 (AR) Argentina Apr Industrial Production M/M: No est v 1.9% prior; Y/Y: 1.5%e v 2.1% prior

- 19:30 (JP) Japan Apr National CPI Y/Y: No est v 0.5% prior; Ex-Food Y/Y: No est v -0.5% prior