• S&P downgrade Spain's long-term sovereign credit rating to 'BBB+' from 'A'; Outlook negative.
• Italy sells to the top of the indicative range in an earlier BTP auction.
• BoJ expand their asset purchase fund by a net JPY 5trl of fresh QE, and keep overnight call rate unchanged.
• Markets await the key US GDP advanced reading for Q1, current median forecast 2.5%.
• RANsquawk European Morning Briefing Video: http://youtu.be/khYSd1ZnvaY
European equities are now trading in modest positive territory halfway through the European session after experiencing a volatile morning. Despite Standard & Poor's downgrading Spain's credit ratings overnight, the IBEX has managed to shake off the news and trade in positive territory. Spain's economy minister was quick to reiterate this morning that Spain is under no pressure to seek a bank bailout, adding that Spain will post a current account surplus next year. As such, the Spanish 10-year government bond yield spread against the German Bund has widened on the session, but remains below the key 6% level.
An earlier Italian BTP auction relieved investors as the Italian treasury sold to the top of the indicative range, however yields did increase across the two on-the-run lines with slightly softer bid/cover ratios.
USD/JPY is seen lower on the session despite the BoJ taking action overnight to extend their asset purchase fund by a net of JPY 5trl in fresh QE, lower than many participants were expecting.
The next flashpoint of activity is likely to be the advanced reading of Q1 GDP from the US, due at 1330BST/0730CDT.
The BoJ have eased monetary policy further by boosting asset purchases by JPY 10trl, but a net gain of JPY 5trl.The BoJ also announced they will buy longer-term government bonds in a show of resolve to pull the economy out of deflation. The board voted unanimously on the additional easing action. The board also voted unanimously to keep their overnight call rate range unchanged at 0.0% to 0.1%. The BoJ now expect CPI to near the 1% goal toward the latter half of the projection period. (RTRS)
BoJ's Shirakawa has commented on the action saying there is no intention to add monetary stimulus each month and it will take time for effect of easing to show on economy. (Sources)
Japanese Markit/JMMA Manufacturing PMI (Apr) M/M 50.7 (Prev. 51.1)
Japanese National CPI (Mar) Y/Y 0.5% vs. Exp. 0.4% (Prev. 0.3%)
Japanese Industrial Production (Mar P) M/M 1.0% vs. Exp. 2.3% (Prev. -1.6%)
Japanese Industrial Production (Mar P) Y/Y 13.9% vs. Exp. 15.6% (Prev. 1.5%)
Japanese Vehicle Production (Mar) Y/Y 143.7% (Prev. 19.7%) (Sources)
Chinese Industrial Profits (Mar) M/M -1.3% (Prev. -5.2%) (Sources)
Fed's Lacker has said the Fed will likely need to start raising interest rates in mid-2013 as the economic conditions do not warrant super-low rates through to late 2014. (Sources)
BarCap US Treasury month end extension seen at +0.01yrs.
EU and UK Headlines
Standard & Poor's have downgraded Spain's long- and short-term sovereign credit rating by two notches to BBB+ and A2 from A and A1 respectively. S&P have also placed the country on negative outlook. The ratings agency has taken the action as it expects the Spanish economy to contract during 2012 and 2013 and expects their budget trajectory is likely to deteriorate against the backdrop of a worsening economy. S&P have said that further downgrades are possible should Spain's net government debt rise above 80% of GDP before 2014. (FT-More)
The Spanish economy minister has commented on the downgrade, saying that it does not take into account reforms announced by the government to reactivate their economy, adding that Spain is under no pressure to seek a banking bailout and Spain will post a current account surplus next year.
Spanish Unemployment Rate (Survey) Q1 24.44% vs. Exp. 23.80% (Prev. 22.85%) (Sources)
German government spokesman Seibert has said the EU fiscal pact cannot be renegotiated, and the country backs structural reforms in Europe, not stimulus and rejects direct bank access to financial backstops. (Sources)
Italy have sold just under EUR 6bln in BTPs at auction, with increasing yields and slightly softer bid/cover ratios across both on-the-run lines. Amid long-term concerns of funding difficulties for the Mediterranean economies, the smooth auction has acted as a relief for participants.
Italy sells EUR 2.416bln in the 4.75% May 2017 BTP with a B/C of 1.341 (Prev. 1.65), yield 4.86% (Prev. 4.180%)
Italy sells EUR 2.5bln in the 5.50% Sep 2022 BTP with a B/C of 1.484 (Prev. 1.65), yield 5.84% (Prev. 5.240%)
Italy sells EUR 493mln in the 3.75% Apr 2016 BTP with a B/C of 2.63 (Prev. 1.87), yield 4.29% (Prev. 4.790%)
Italy sells EUR 537mln in the 4.25% Feb 2019 BTP with a B/C of 2.27, yield 5.21%. (Sources)
Standard & Poor's have affirmed Ireland's long- and short-term ratings at BBB+ and A2; outlook negative. S&P have said the ratings could come under pressure if Ireland were to lose its access to funding from the ESM following their referendum. (Sources)
Italian PM Monti has added to criticisms of the austerity-led reform efforts in the Eurozone, saying that the policies were shrinking Europe's economy and could deepen a double-dip recession. (FT-More) Monti added that budget discipline is needed, but it must be accompanied by policies that drive economic demand.
BarCap Pan Euro Agg month end extension seen at +0.11yrs.
European equities are trading in modest positive territory. Despite concerns regarding Spain and their S&P downgrade, the IBEX has shaken the sentiment and manages to trade positively at the halfway point of the session.
Following their corporate earnings release yesterday, Barclays continue to outperform today as the company holds its AGM. The company CEO Diamond has said that as company profits rise, he expects to be able to materially increase the amount of dividend shareholders receive. The CEO added that their objective is such that the portion of profits distributed as dividends will normalise much higher than the current level today. Following the commentary, Barclays shares currently trade higher by 5%.
Following the release of their corporate earnings pre-market today, BASF are underperforming today. Although the company recorded a rise in sales and beat on EPS, analysts have noted the lack of pricing power across chemicals, plastics and performance products as a negative surprise, with the company relying on the second half of this year to reach guidance for full year earnings growth. At the midway point of the session, BASF shares trade lower by 1.6%.
Top performing sectors in the BE500: Industrials (+1.21%), Financials (+1.09%), Basic Materials (+0.77%)
Worst performing sectors in the BE500: Consumer Goods (-0.56%), Telecoms (-0.18%), Technology (-0.15%)
**Note: For US equity news in detail, refer to the RANsquawk Daily US Equity Opening News report.
EUR/USD was making losses following the overnight news that Spain had been downgraded, however the pair has shaken off the sentiment and has bounced since a decent Italian BTP auction and moving in line with the gains in European equities.
JPY saw some significant weakness following the BoJ easing action; however USD/JPY is now seen lower in the European session, as participants came to grips with the QE announcement. Markets were expecting a larger quantity of easing, so JPY strength is observed. BoJ's Shirakawa further commented that there is no plan to add the stimulus each month, adding to the sentiment.
WTI and Brent crude futures are trading in minor negative territory as participants await the key GDP data from the US at 1330BST/0730CDT.
Oil & Gas News:
• Iran would welcome a fall in oil prices because it may reduce the output at rival producers, according to the National Iranian Oil Company head of international affairs.
• China's Unipec may halt diesel imports for a sixth month in May because of adequate domestic stockpiles, according to a company official.
• Japan's oil imports rose 11% and the purchase of fuel rose 5.4 % in March from one year earlier, according to data from the Ministry of Economy, Trade and Industry. Japan's imports from Iran fell 36.4% across the same period.
• According to an EIA oil report set for release, the US is unlikely to pull back from levying sanctions against Iranian oil as crude markets are sufficiently supplied to move forward with the penalties.
• Islamist militants linked to Al Qaeda blew up a gas pipeline last night in the Eastern Yemeni province of Shabwa, according to a local official and residents. This is the third attack against oil and gas facilities in the country within a month and the second on that particular pipeline.
• A top Iraqi official has said a dispute between Iraq's central government and the semi-autonomous region of Kurdistan is an internal affair, in an implicit rebuff of US efforts to broker a compromise between the two sides.
**Note: For commodities news in detail, refer to the RANsquawk Daily Energy Commentary report.
Prices taken at 1216BST
**'Market talk' – Signifies information that has not been formally tested through traditional journalistic channels and therefore is to be treated as unsubstantiated. Any interpretation of the talk is taken at the readers own risk and is a representation of the rumours within the market place and never generated by ourselves.
View All Market Commentary
*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.