• European data remains weak throughout the morning, with European PMIs as well as the German IFO disappointing to the downside.
• Recovery of equity markets follows unconfirmed market talk of asset reallocation from fixed-income into stocks.
• UK recession deepens as Q1 GDP is revised lower to -0.3% from -0.2%.
• ECB's Nowotny says the full ECB arsenal has not yet been utilised.
• French 10yr OATs outperform amid unconfirmed market talk of domestic and Asian names buying.
• RANsquawk European Morning Briefing Video: http://youtu.be/ewP5KI0JaO0
Peripheral stock indices underperformed in early trade, with banks under considerable selling pressure amid renewed tensions in credit markets. Wave after wave of poor data from the European PMIs and the German IFOs placed shares under further pressure and talk of macro names selling EUR/USD weighed on the pair. As a result, in the fixed income space, the German 2/5 spread traded at levels not seen since December 2008. However as the session progressed, stocks staged a decent recovery, which coincided with unconfirmed market talk of an asset reallocation trade, together with talk of Asian real money accounts buying French OATs, which in turn prompted sharp tightening in FR/GE 10y bond yield spread.
This also supported EUR/USD, which after coming close to making a test on the 1.2500 barrier is now trading little changed. In other news, the ONS reported that the UK economy shrank by 0.3% in the first three months of the year, more than previously thought. The downward revision was due to a bigger contraction in construction output than previously estimated. Despite this, FTSE in the cash has persisted, and is the strongest performing index in Europe today.
Going forward, the second half of the session sees the release of the latest weekly jobs data from the US, as well as Durable report for the month of April. Also, the US Treasury will conduct a sale of USD 29bln in 7y notes.
Japan's corporate mood picked up over the last month and is seen as improving in the coming months as the economy continues its recovery from last year's earthquake. Concerns continue to remain from the European crisis and a Chinese slowdown, according to the Tankan survey. (Newswires)
Chinese HSBC Flash Manufacturing PMI (May) M/M 48.7 (Prev. 49.3) (Newswires)
The PBOC should continue to cut their RRR and take other measures to increase the country's money supply, according to an influential Chinese paper. (China Securities Journal) In other Asian press, Xinhua have reported that China may ease property development credit controls. (Xinhua)
EU and UK Headlines
Italian PM Monti has said there has been no conclusion on growth boosting measures or Eurozone bonds at their informal summit. Italian PM Monti and French President Hollande said that they both favour Euro-zone bonds as a possible solution, with Monti commenting that a majority are in favour of the bonds according to a source. (Newswires)
Tensions have begun to emerge among EU leaders over how hard a line to take with Greece as the prospect looms of victory in next month's elections for parties opposed to the country's bailout terms. (FT-More) There have been signals from both Paris and Rome that some concessions may be required to strengthen the position of pro-bailout parties in Greece. Further from the meeting, ECB's Draghi has said ECB independence was held up by most leaders at the informal EU summit. (Newswires)
Markets have moved through a slew of poor European and UK data this morning, with European services and manufacturing PMIs disappointing to the downside on most readings, as well as UK GDP data showing country is deeper in recession than originally thought. The ONS have placed the sharp decline of the UK's construction data as the main drag on growth in the first quarter.
French Manufacturing PMI (May P) M/M 44.4 vs. Exp. 47.0 (Prev. 46.9)
French Services PMI (May P) M/M 45.2 vs. Exp. 45.7 (Prev. 45.2)
German Manufacturing PMI (May A) M/M 45.0 vs. Exp. 47.0 (Prev. 46.2)
German Services PMI (May A) M/M 52.2 vs. Exp. 52.0 (Prev. 52.2)
Eurozone Manufacturing PMI (May A) M/M 45.0 vs. Exp. 47.0 (Prev. 45.9), lowest since June 2009
Eurozone Services PMI (May A) M/M 46.5 vs. Exp. 46.0 (Prev. 46.9)
German IFO - Business Climate (May) M/M 106.9 vs. Exp. 109.4 (Prev. 109.9)
German IFO - Current Assessment (May) M/M 113.3 vs. Exp. 117.1 (Prev. 117.5)
German IFO - Expectations (May) M/M 100.9 vs. Exp. 102.0 (Prev. 102.7)
UK GDP (Q1 P) Q/Q -0.3% vs. Exp. -0.2% (Prev. -0.2%)
UK GDP (Q1 P) Y/Y -0.1% vs. Exp. 0.0% (Prev. 0.0%) (Newswires)
The pessimistic data pushed Bund futures to record highs, printing 144.55 earlier in the session, coinciding with session lows in EUR/USD.
European stocks in both the futures and the cash were taking heavy hits early in the session, with informal EU summit failing to come to an agreement weighing on sentiment early on. Progressing through the session, risk-aversion was noted with number-after-number of disappointing data from Europe, Germany and the UK coming in below expectations. Despite this, stocks have managed to stage somewhat of a recovery and now trade in the green in all sectors halfway through the European session. The moves follow some unconfirmed market talk of an asset reallocation from the fixed-income markets and into equities.
In individual stock news, Repsol shares are performing particularly strongly following confirmation from the company that their Brazilian pre-salt block holds significant potential, with resources amounting to 700mln BBLs of light crude and 3TCF of gas. After reporting the major discovery, Repsol shares now trade higher by 2.2%.
Major Basic Materials companies are seen trading lower with the larger cap names Glencore and Xstrata making the largest losses. This follows overnight manufacturing data from China disappointing to the downside, dampening expectations for future commodities demand. Glencore and Xstrata shares trade lower by roughly 1.2% apiece.
**Note: For US equity news in detail, refer to the RANsquawk Daily US Equity Opening News report.
EUR/USD came under renewed selling pressure early in the European session, pressing the pair down to lows of 1.2516, amid market talk of macro names selling in the pair. The weaker European data has placed the single currency under continued downward pressure, however; the pair has seen somewhat of a recovery, moving in line with the European stocks, coming off the lows and back up through 1.2550. The pair now trades between two touted option expiries at the 1.2550 and 1.2600 level for the 10am NY cut (1500BST).
GBP/USD has been echoing the moves in its European counterpart and came under particular pressure following the downward revision to UK GDP, moving lower by just under 20pips following the release. A strong performance in the Business Investment component of growth has been noticed, and the pair, similarly to the EUR, has seen a spell of strength alongside equities. GBP/USD currently sits just below a touted option expiry at the 1.5700 level for the 10am NY cut (1500BST).
WTI crude futures traded near a 7-month low as risk-averse trade became the main theme in the early part of the European session, following weaker data points out of Europe. Progression on the Iranian nuclear talks has eased concerns somewhat in the oil markets, with talks resuming today.
Oil & Gas News:
• Three Nebraska landowners on Wednesday challenged a state law aimed at speeding up approval of a new route for TransCanada's proposed Keystone XL oil pipeline from Canada to Texas around environmentally sensitive areas of the state.
• India oil ministry official says there is no possibility of fuel retailers rolling back gasoline price hike.
• The P5+1 group will today make a last-ditch attempt today to persuade Iran to accept immediate restrictions on its nuclear programme, hoping that such concessions will begin to defuse fears that Tehran wants an atomic bomb.
• World powers are hindering talks in Baghdad with Iran over its nuclear programme, creating a "difficult atmosphere", an Iranian delegation official said on Thursday.
• A U.N. watchdog report is expected to show that Iran has installed more uranium enrichment centrifuges at an underground site, potentially boosting output capacity of nuclear work major powers want it to stop, Western diplomatic sources say.
**Note: For commodities news in detail, refer to the RANsquawk Daily Energy Commentary report.
Prices taken at 1205BST
Gold June options expiry (1830BST/1230CDT)
Silver June options expiry (1825BST/1225CDT)
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