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•CIC agrees to buying 44.7 million shares of the 80.2 million shares being offered by Morgan Stanley for $1.2 billion, raising stake in the US bank to 9.86% •Temasek and Hong Kong tycoon Richard Li's Pacific Century Group may join an investor group in talks to buy AIG's asset management unit •US Vice President Biden says the administration's credibility is on the line over how it spends the $787bn stimulus package intended to revive the economy •ECB member Nowotny wrote last week that the bank can expand its asset-purchase program to buy commercial paper or bonds, a letter obtained by Bloomberg News shows •Nationwide Building Society's  UK consumer confidence index rose to 53 last month from 51 in April, the highest since November •European Union finance ministers are set to endorse next week a sweeping reform of the bloc's financial supervision system, a draft document shows •Japan's government is likely to upgrade its economic assessment for the second month running in June the Nikkei business daily reports •BoJ member Hidetoshi Kamezaki warns that huge bond issuance to fund government stimulus measures taken across the globe could push up interest rates •Australian GDP rose 0.4% in the three months to March, up from the previous quarter when it fell a revised 0.6%

US
China Investment Corp, the country's sovereign wealth fund, said it is buying into a $2.2 billion common stock offering by Morgan Stanley because it is confident in the Wall Street bank's prospects. CIC is buying 44.7 million shares of the 80.2 million shares being offered for $1.2 billion, raising its stake in Morgan Stanley back to about 9.86%.

Singapore's Temasek Holdings and Hong Kong tycoon Richard Li's Pacific Century Group may join an investor group in talks to buy American International Group Inc's asset management unit, Reuters reported. Franklin Resources and Crestview Partners LP are in exclusive talks for the business, and the two Asian investors are considering taking part in that consortium.

Joe Biden, US vice president, said that the administration's credibility is on the line over how it spends the $787bn stimulus package intended to revive the economy.
http://www.ft.com/cms/s/0/f345d334-4fad-11de-a692-00144feabdc0.html

Enhanced trade with China could boost employment in the United States, U.S. Trade Representative Ron Kirk said, adding that the Obama administration hoped to ease friction in commercial ties with China.

ABC News said its weekly index on U.S. consumer confidence, after reaching a seven-month high in early May, fell in the latest week. The Consumer Comfort Index dropped to -49 from -47 the prior week.

Bank of America Corp., the biggest U.S. lender, has raised almost all of the $33.9 billion demanded by regulators after last month's stress tests and now expects to “comfortably exceed” that number. The tally of capital raised till date was increased by a $9.5 billion swap with private holders of perpetual preferred stock for about 704 million common shares, the bank said.

JPMorgan Chase is disbanding an investment-banking unit that wagers the lender's money on hedge funds, leveraged buyouts and real estate, Bloomberg reported. The bank  will shut down the principal investment management group's hedge-fund business and its private-equity division, except for a team that focuses on Asia.

EUROPE
European Central Bank council member Ewald Nowotny wrote last week that the bank can expand its asset-purchase program to buy commercial paper or bonds, a letter obtained by Bloomberg News showed.

British consumers were their most upbeat in May since the end of last year as people became more confident about the prospects for the economy. The Nationwide Building Society's consumer confidence index rose to 53 last month from 51 in April, the highest since November.

The pace of decline in Britain's job market eased again in May with permanent placements falling at the slowest rate for ten months. The KPMG/Recruitment and Employment Confederation Report on Jobs showed an index reading of 41.7 for permanent placements in May, up from 37.3 in April.

The UK financial services watchdog has roughly doubled its fees for the biggest retail and investment banks, an even greater increase than expected, after bowing to pressure from small financial advisers for less swingeing rises. The Financial Services Authority is lifting the overall cost of policing the industry by 35.8 per cent to £435.5m ($722.3m).
http://www.ft.com/cms/s/0/ac360d48-4f9d-11de-a692-00144feabdc0,s01=1.html

Leading shareholders in Lloyds Banking Group have predicted that Eric Daniels, the chief executive, will be forced out when the part-nationalised bank appoints a new chairman.
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6418584.ece

European Union finance ministers are set to endorse next week a sweeping reform of the bloc's financial supervision system, a draft document showed, but it left open the exact role of the European Central Bank.

James Pallotta, the investment manager who split with longtime partner Paul Tudor Jones at the start of the year, plans to shut his Raptor Global hedge funds after losing almost 29 percent since the start of 2007.

JAPAN
Japan's government is likely to upgrade its economic assessment for the second month running in June, effectively declaring that the world's No. 2 economy has hit bottom, the Nikkei business daily reported.

BoJ policy board member Hidetoshi Kamezaki warned that huge bond issuance to fund government stimulus measures taken across the globe could push up interest rates.

AUSTRALIA & NEWZEALAND
Australian GDP rose 0.4 percent in the three months to March, up from the previous quarter when it fell a revised 0.6 percent.

Senior Australian Treasury officials defended official forecasts for strong economic growth when Australia emerges from recession, and said they were puzzled by IMF forecasts for a slower rebound. They expect the economy to grow at 2.25% in 2010-11 versus an IMF forecast of a mere 1.1%.

ASIA
South Korea's Finance Minister said that export conditions are getting worse and asked ministries to monitor the country's overseas sales. The remark followed the release of data showing exports from Asia's fourth-largest economy fell more than expected in May from a year ago, with growth in the value of daily exports posting the slowest pace in four months.

Events (London time):
NOR    08:00    PMI (May)
ESP    08:15    PMI Services (May)        42.8
SWE    08:30    Current account (Q1)
ITA    08:45    PMI Services (May F)        43.0
FRA    08:50    PMI Services (May F)        47.8
DEU    08:55    PMI Services (May F)
EMU    09:00    PMI Services (May F)
EMU    09:00    PMI Composite (May F)
ESP    09:00    Consumer Confidence (May)
GBR    09:30    PMI Services (May)
EMU    10:00    GDP (Q1 P)
EMU    10:00    PPI (Apr)
GBR    10:30    BRC Shop Price Index (May)
USA    12:00    MBA Mortgage applications
USA    13:15    ADP Employment Change (May)
USA    15:00    Factory Orders (Apr)        0.0%
USA    15:00    ISM Non-Manf. Composite (May)    44.5


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$       The Fed will announce approvals on the initial group of bank applications to repay TARP funds during the week of 8 June; among the criteria to be approved, banks "must demonstrate an ability to access the long-term debt markets without reliance on the FDIC's Temporary Liquidity Guarantee Program (TLGP), and must successfully demonstrate access to public equity markets"

$       General Motors filed for Chapter 11 bankruptcy as widely expected on Monday; the US government will extend another $30.1bn in loans and acquire a 60% stake; the Canadian government will take about 12%; the company said it could emerge from Chapter 11 in August

$       General Motors and Citigroup will be removed from the Dow (DJIA) effective at the start of trading on Monday 8 June; Cisco Systems Inc (CSCO, +5.4%, $19.50) will replace GM while Travelers Co (TRV, +3.1%, $41.91) will replace Citi

$       US Tsy Secretary Geithner: "We are very committed to make sure that when recovery is established that we go back to living within our means; that we bring our fiscal deficits down to a sustainable level; that we unwind and reverse these exceptional measures we've taken in the financial sector"

$       The US ISM manufacturing index rose to 42.8 in May from 40.1 in April, above expectations of 42.3 and the highest since Sep’08; the new orders balance rose to 51.1 from 47.2 previously, posting the first “growth” reading since the start of the recession (52.8 in Nov’07); the production balance remained in contraction territory at 46.0 but rose to the highest since Aug’08

$       US personal income rose 0.5%MoM in April versus a revised decline of 0.2%MoM in March (initially -0.3%), supported by provisions within the 2009 stimulus package; real personal spending fell for the second consecutive month, down 0.1% versus -0.3% previously; the saving rate jumped to +5.7% from +4.5% in March and was the highest since Feb’95

$       The US price measure of core personal consumption expenditures rose 0.3%MoM in April versus 0.2%MoM in March; the annual pace rose to 1.9% from 1.8% previously, but remained below the 12m average of 2.1%

€       The Eurozone final manufacturing PMI was revised marginally higher to 40.7 in May versus the advance estimate of 40.5; the index is up 3.9pts from April at the highest level since Oct’08; however, the 3m average remained depressed at 37.1 compared with the historic mean of 51.4

£       The UK manufacturing PMI rose to 45.4 in May versus an upwardly revised 43.1 in April (initially 42.9) and was the highest since Jun’08; the 3m average (42.7) remained below pre-Lehman levels; the new orders balance remained in contraction territory but rose 2.5pts to 48.9, the highest since Apr’08

£       The UK BoE purchased £3.38bn in 2020-2032 gilts during the competitive reverse auction versus market offers of £5.347bn (cover ratio: 1.58); in the noncompetitive auction the BoE purchased £110m in gilts

The Day Ahead

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•GM in last lap to Chapter11 bankruptcy;  Obama administration pushes through a restructuring that will cost taxpayers billions of dollars more than previously envisioned •Fed's Fisher says US economy will not recover in a "meaningful" way before end of 2009; says deflation risk persists •South Korea's National Pension Service to lower its exposure on U.S. bonds, the Ministry for Health, Welfare and Family Affairs says •Japan's big banks to skip BoJ's loan offering; more inclined to raise capital from the capital markets, the Nikkei reports

•    Japan's April industrial output rose 5.2%, biggest monthly gain since 1953 (est: +3.2%)

•Japan's unemployment rate in April rose to 5% from 4.8% in March, rising to a 5yr •Treasury's Geithner to reassure Chinese leaders that the US is committed to long-term fiscal discipline, a senior Treasury official says •UK consumer confidence held steady at -27 in May (est. -25) after 3 months of improvement, the GfK survey showed

 

Europe:

Credit Suisse has begun a sale of its London property estate that could raise as much as £500m (€572m) as part of a strategy to focus on core banking operations.

http://www.ft.com/cms/s/0/c54b7bd2-4bb6-11de-b827-00144feabdc0.html

 

UK consumer confidence held steady at -27 in May (est. -25) after 3 months of improvement, the GfK Consumer Confidence Survey showed.

 

Poland's central bank governor has reiterated his call for banks to refrain from paying out dividends this year in order to strengthen their balance sheets during the economic downturn, echoing similar calls from other central banks in the region.

http://www.ft.com/cms/s/0/92673510-4ba4-11de-b827-00144feabdc0.html

 

The Financial Services Authority was yesterday accused of going too easy with the stress tests on UK's troubled lenders by testing their financial resilience against unchallenging assumptions.

 The FSA said the tests "will continue to evolve and the precise parameters used and will change over time".

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5402251/Bank-stress-tests-too-easy-analysts-say.html

 

US:

The Obama administration plans to usher General Motors into bankruptcy court Monday and push through a restructuring that will cost taxpayers billions of dollars more than previously envisioned. The government altered the terms of the restructuring and offered GM bondholders a sweetened deal if they would forgive $27bn in unsecured debt and pledge not to oppose the reorganization in court.

 

Fed's Fisher said the U.S. recession is fading but the economy will not recover in a "meaningful" way before the end 2009 and deflation remains a risk in this climate. He added that official foreign holdings of U.S. government bonds had grown and appetite to hold the country's assets remained intact, despite expected record U.S. government deficits. 

 

The Depository Trust & Clearing Corporation, the US clearing and settlement system, said it had applied to bring its “trade warehouse”, which stores information on credit derivatives trades, under the oversight of US federal regulators for the first time.

 

http://www.ft.com/cms/s/0/264a5562-4bcf-11de-b827-00144feabdc0.html

 

Bank of New York Mellon wants to be among the first round of US banks to repay Tarp money to counter concerns that clients could think the aid is a sign of weakness, and because it does not want restrictions on compensation. Chairman and chief executive of the bank said that he hoped to return the money in June or July.

http://www.ft.com/cms/s/0/65e0ed80-4bc5-11de-b827-00144feabdc0.html

 

Treasury's Geithner will reassure Chinese leaders that the US is committed to long-term fiscal discipline, a senior Treasury official said. Mr Geithner will also urge his hosts to accelerate moves to shift the composition of China's economy, so it relies less on exports and more on domestic demand, the official added.

http://www.ft.com/cms/s/0/88726e62-4bdb-11de-b827-00144feabdc0.html

 

OPEC ministers held output steady and instead bet on economic growth and recovering demand to drive an oil market that leapt to a six-month high above $65. Saudi Oil Minister Naimi said the world was ready to cope with oil at $75-$80 a barrel and predicted it could reach that level before the end of the year, although other ministers said it could take longer than that.

 

Home-mortgage rates have surged to their highest level in more than three months, threatening prospects for quick rebounds in the housing market and consumer spending. The average rate for 30-year fixed-rate loans jumped to 5.44% yesterday, the highest level since early February, according to a survey by HSH Associates, a financial publisher.

http://online.wsj.com/article/SB124352408197662869.html

 

U.S. government bonds account for 83% of the pension fund's direct holdings of foreign bonds, which are currently worth $6.5 billion.

 

Australia/ New Zealand:

Australian bank lending increased in April for a fourth month. Loans provided by banks and other finance companies climbed 0.1% from March, when they also gained 0.1%, the RBA said. Bloomberg estimated a 0.2% rise.

 

Japan:

Big banks to skip BoJ's loan offering and are now more inclined to raise capital from the capital markets, which have regained stability since March, the Nikkei said. http://www.cnbc.com/id/30990292

 

Japan's industrial output rose 5.2% in April, the biggest monthly gain since 1953 and sharply higher than the median market forecast for a 3.2% rise.

 

Japan's unemployment rate in April climbed to 5% from 4.8% in March, rising to a five-year high.

 

Japan's consumer prices excluding food declined 0.1% in April, declining for a second month in April, adding to signs that the recession will herald a return to deflation.

 

Asia & RoW:

South Korea's National Pension Service will lower its exposure on U.S. bonds while diversifying its investments to include instruments such as credit bonds, the Ministry for Health, Welfare and Family Affairs said. U.S. government bonds account for 83% of the pension fund's direct holdings of foreign bonds, which are currently worth $6.5bn.

http://in.reuters.com/article/fundsNews/idINSEO2163320090529

 

South Korea's industrial production in April rose 2.6% from March (Bloomberg est. +2.1%), increasing for a fourth straight month. From a year earlier, production decreased 8.2%.

 

South Korean manufacturers' assessment of the business outlook for June jumped to 74 (May: 67), an eight-month high, data showed on Friday. Non-manufacturing sector's seasonally-adjusted business survey index also climbed to an eight-month high of 75 for June from May's 68.

 

Events (London Time):

 

SWE    08:30    GDP s.a. (Q1)

DNK    08:30    Unemployment Rate - sa (Apr)

EMU    09:00    M3 money supply s.a. (Apr)

EMU    09:00    M3 mma money supply (Apr)

NOR    09:00    Retail sales - vol sa (Apr)

NOR    09:00    Unemployment rate (AKU) (Mar)

ITA    10:00    HICP (May P)

EMU    10:00    CPI Estimate (May)

EMU    10:00    Unemployment Rate (Apr)

CHE    10:30    KOF Swiss Leading Indicator (May)

ITA    11:00    PPI (Apr)

CAN    13:30    Current Account (BOP) (Q1)                  CAD-10.0bn

USA    13:30    GDP QoQ (Annualized) (Q1 P)                 -5.5%

USA    13:30    GDP deflator (Q1)                           2.9%

USA    14:45    Chicago PMI (May)                           44

USA    15:00    Univ. of Michigan Confidence (May F)        68

FRA    17:00    Total Jobseekers (Apr)

 

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New technologies and different ways of working will change the business landscape more radically than at any time since the industrial revolution, according to research commissioned by HSBC, the banking group.

Its report, published on Friday, creates a map of the business hubs it expects to develop over the next 20 years. Instead of pictograms of factories and coal mines familiar to past generations of schoolchildren, the new map is dominated by symbols for wind farms, robotics, nanotechnology and stem-cell research.

It is likely to be welcomed by Lord Mandelson, business secretary, who hopes to drive the UK's recovery from recession by developing new technologies and advanced manufacturing.

Many of the centres are outside London and the South East, underlining the potential that broadband connection creates for building businesses in outlying regions.

Although the Midlands and northern England are being hit hardest by the recession, the report argues that, in the longer term, mobile working could bridge the north-south divide.

Its predicted hotspots include Durham and Newcastle (nanotechnology), Manchester (stem cells and robotics), York (biotechnology) and Dundee (computer gaming, biotechnology and “nutraceuticals”, or foods with health benefits).

EXPERTISE IN THE NEWCASTLE PIPELINE

HSBC's prediction that Newcastle will become a post-recession technology hotspot will come as no surprise to Nick Searby, writes Brian Groom. As managing director of Durham Pipeline Technology, which makes robots that crawl through oil and gas pipelines for cleaning, repair and maintenance, he is already convinced that access to talented graduates and good transport links make the city a perfect spot for budding entrepreneurs.

The company was spun off from Durham university in 2004 by Prof Ernie Appleton, who has since retired. It is now based at Gateshead, near Newcastle, where several pipeline companies are clustered around a General Electric technology centre. It employs nine people, most who were Durham students.

“There's an awful lot of knowledge in Newcastle and the universities tap into that by providing specialised courses,” said Mr Searby, who joined 18 months ago from GE. “The cost of living is good compared to down south. It's a really nice place to live. The airport's good, so you can get out when you’ve had enough. All in all it's a good place for graduates to start out.”

DPT hopes to break even by the end of this year and build annual turnover to £3m within two years. “The market size is tremendous,” said Mr Searby.

The report, by HSBC Commercial Banking and The Future Laboratory, a forecasting and strategy specialist, is based on interviews with 18 industry experts and a survey of 500 entrepreneurs and decision-makers in 17 UK cities.

Critics of futurology say it merely projects present trends into the future – and cannot predict unforeseen shifts – but the report is at least a guide to patterns emerging now.

“In the last decade, the notion of the ‘culture capital’ became a buzzword, as cities such as Cardiff, Newcastle, Gateshead, London and Liverpool worked with so-called ‘starchitects’ such as Norman Foster, Richard Rogers and Wilkinson Ayre to create business opportunities and global profiles,” Martin Raymond, the report's author, said.

It selects five “supercities” that it thinks will derive prestige from new income streams or ways of working: Newcastle, Leeds, Liverpool, Brighton and London.

Whatever it does for innovation, the report may offend lovers of the English language with its use of jargon such as “bleisure”, the deliberate and desirable blurring of business and pleasure, and “emo-nomics”, an economic system based on emotional responses.

It identifies types of emerging entrepreneur. Liam Walsh, a 19-year-old, Brighton-based street magician, video editor, promotions manager and website builder is an example of the “slash/slash careerist” – so called because of the way they describe their various jobs, such as video editor/producer/promotions manager.

Darika Ahrens, a 29-year-old freelance new media consultant from Borough in London, is seen as a “referral economist”, a new breed of business matchmaker who profits from connecting people.

Many entrepreneurs are described as “New Millennials”: born between 1985 and 1990, a generation immersed in technology, now penetrating new and old businesses.

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$       UST 10yr yields surge despite a solid 5y auction on MBS convexity trading; US$35bn 5yr auction: b/c 2.32; indirects: 44.2%; the market behaviour highlights the limitations of central bank quantitative easing as a short-term solution for lenders’ liquidity needs, as opposed to an end-game solution for broken credit markets

$       USD 3m Libor rises for the second day on futures sell-off and quarter-turn calendar effects falling into key contract maturities from Monday; the 50bps support line for the TED spread highlights the systemic risks that remain in the market

G+      USD stabilizes on rekindled liquidity concerns; oil steady at $63bbl ahead of an unchanged OPEC decision on production expected today; back month contracts sell off on rising doubts about an economic recovery, despite strong demand from China and Saudi Arabia's forecast of $70-80bbl by year-end

$       US existing home sales came in on the weak side of expectations at a 4.68m pace in April (+2.9%MoM) versus 4.55m in March (-3.4%, revised down from -3.0% originally); months supply rose to 10.2 from 9.6 before; median home prices are down 15.4%

€       ECB's Nowotny: signs of the recession bottoming out but expects low growth rates after the crisis has ended 

£       UK BoE's Blanchflower: do not assume that the crisis is over

The Day Ahead

Economic sentiment surveys dominate the economic calendar in Europe today. The Bloomberg PMI released this morning signalled a stabilising pace of contraction in retail activity across the Eurozone in May, in spite a general improvement in consumer sentiment on the national surveys. The European Commission confidence surveys are likely to signal a further improvement in economic conditions but ongoing weakness in investment and consumption activity. In the US, yesterday's somewhat disappointing existing home sales figures have left the market undecided on whether the housing market is showing green shoots. The past week's blow-out in long-end UST rates and the bottoming out of Libor leave us more sceptical about the funding outlook for the housing market. This underpins our concerns about the sustainability any stabilisation in housing demand in the second half of the year. The market is looking for continued weakness in US ex-large ticket durable goods orders, despite the recent better tone in producer capex sentiment surveys.

In policy events, today's calendar brings a constellation of ECB speakers including Constancio, Liikanen, Tumpel-Gugerell and Weber, who speak on monetary theory and policy at 15:15. ECB's speaks at 17:00. In debt supply, the UK will sell £1.25bn in 1.25%, 2032 inflation-linked bonds. The US Treasury will sell $26bn in 7yr notes.

Markets

Key market risk gauges, including the Vix and the US 3m Libor – T-bill Ted spread, are signalling “a normalization of the post-Lehman normalization” in US financial markets. This spells out a more moderate tone to risk markets, which - in the context of an expansionary Fed policy stance and stabilising global investor access to dollar liquidity - warrants a shift away from momentum and into value trades. As we argued a few weeks ago, the approach of key pre-Lehman levels for financial liquidity premia, as reflected in interbank credit spreads and implied equity volatility, suggests that the policy-driven normalization in market conditions following the disorderly fallout from Lehman's collapse is now all but complete. This will make further gains in risk assets harder to achieve, at least until the market's pricing of a strong recovery is substantiated by the real economic figures. This view has held so far. Since 11 May, the S&P 500 has range-traded between 870 (the average since Lehman) and a top-end at 924 (944 ytd high; 930 May 8 high). The general recovery in risk conditions over-extended last week, with the TED spread falling below 50bps and the Vix falling through 30 (as the S&P reached 924), and the correction of this is now underway with 3m Libor rising for the second session yesterday and the VIX returning back above 32. To summarise our strategic views from this, a shift in gear in the market's momentum almost invariably produces a psychological change in investor attitudes towards risk – just as the equity market rally since March united the market around the desirable probabilities of declining money market risk premia and an economic recovery, the loss of momentum behind the risk rally will shift focus towards the uncertainties that still plague the market in the form of financial systemic risks (bank asset quality and capitalization, disrupted sub-investment credit markets), deteriorating public finances including growing central bank exposure towards private sector risk, and the depth of any inventory-driven rebound in G7 economies, given a large and growing level of spare capacity in the construction and industrial sectors. There are numerous ways to express this shift in momentum but if I can pick an obvious favourite from recent days: a generally positive market liquidity environment is not conducive to trading “fat tail” risks (loss-making is the prerogative of academic risk watchers;), but it is a great time to hedge against uncertainties. The renewed steepening in the VIX term futures curve and the coincidental rise in rate volatilities to pre-equity rally levels in March (second chart above) suggest that the market is already moving in this direction, shifting focus from recovery hopes towards trading uncertainties about systemic risks and the economic cycle. A Goldman view published by Reuters yesterday noted that the VIX index has not exceeded 30 for multiple years since the Great Depression and this is where the market's pricing is for the next two years. It looks like even on this most celebrated gauge of normalizing market conditions, the glass is as half-empty as it is half-full. Higher term Libor rates, the inability of AUD/JPY, one of the most traded risk forex pairs, to breach pre-Lehman levels and elevated UST yields outside the Fed's front-end buying schedule this week, despite a heavier tone to equities and strong month-end demand for the UST's 2 and 5y auctions this week, are all good reasons to prepare for more market uncertainty and stock up on volatility. This seems to be precisely the message that recent Fed, ECB and BoE comments are sending to the markets: should not assume that the crisis is over.

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$       US Tsy Secretary Geithner said things have clearly stabilized but the recovery will be bumpy; on regulation, the “archaic, segmented, complex oversight regime” will have to be changed to reduce risks

€       ECB's Weber said that covered bonds are a manageable risk for the ECB and the current level of interest rates is appropriate for now; the worst of the economic cycle seems to be past but sustained growth rates are not expected until mid-2010

€       ECB's Provopoulos: if economic “stabilization is indeed taking place, it is at a very low level of activity. It will take some time before our economies fully recover and grow at a robust pace"

$       The US NAHB housing market index rose 2pts to 16 in May and was the highest since Sep’08, a more positive signal for housing starts

$       US Fed purchased $3.18bn in USTs maturing between Aug 2019 and Feb 2023 versus offers of $15.217bn (cover ratio: 4.79)

€       The Eurozone trade balance rose to -€2.1bn in March versus a revised -€2.9bn in February (initially -€4.0bn); on a year-to-date basis, the balance was up 128% versus the equivalent period of 2008

£       UK BoE purchased £3.43bn gilts in the competitive reverse auction versus offers of £10.9bn (cover ratio: 3.18); gilt purchases totaled £60m in the non-competitive auction

The Day Ahead

The UK CPI is expected to moderate from +2.9%YoY posted in April to 2.4%, the lowest since Jan’08, reflecting a smaller contribution from energy prices. The CPI is expected to fall further this year as household demand remains weak and curtails retailer pricing power. 

 

The German ZEW this morning will up the ante for Eurozone markets ahead of the key PMI releases out on Thursday. Institutional sentiment is likely to bring further evidence that the recession is easing, although the pace of stabilisation remains slow and current conditions have continued to deteriorate.

US April housing starts are expected to stabilize versus the Q1 average. Homebuilders’ sentiment improved for the second consecutive month in May, but it remains depressed by historical standards. 

In policy events, ECB's Tumpel-Gugerell speaks at 10:00 on "Ways out of the crisis: The new financial architecture and the role of Europe." Fed's Stern (non-voter) speaks on financial conditions and the economic outlook at 18:15. In debt supply, Ireland will auction €0.75-1.0bn in 2014 and 2019 bonds. The UK will sell £1.25bn in 4.75% 2038 gilt.

Markets

US stocks bounced back at the start of the week after better-than-expected results and an upbeat outlook from Lowe's (LOW, +8.1%, $19.94), the US’ 2^nd largest home improvement chain, and positive analyst comments on Bank of America (BAC, +9.9%, $11.73) which boosted hopes that the recession is entering a more moderate phase and economic conditions are stabilizing. Oil lifted back near $60bbl, the MSCI EM jumped 2.9% (to the highest since October), the Nikkei also ended 2.9% higher and risk-sensitive forex majors (EUR, AUD, GBP) are making ground against the dollar and the yen amid further gains for equity futures this morning. The S&P's close above the 900 mark spurred a sell-off in USTs which lifted the 10y yield back towards 3.26%, matching the highs seen last week. Technically the S&P looks less overbought; speculative long positions have been pared back and the drop in volatilities encourages real money involvement – there is still no reason to expect the risk rally to capitulate, even if the momentum has subsided relative to the past couple of months. However, positioning in rates looks more constructive and the latest CBOT data shows net short speculative positions in 10y USTs at the lowest level since last summer, which looks overdone – its suggests that the market is tracking volatilities, Libor-OIS spreads and emerging market portfolio risk, but it is under-pricing the Fed's buybacks, the S&P's failure to breach this year's high in January and elevated CDS spreads. This implies room for a rapid decline in UST yields over the summer months with a 2.60% target for 10s now widely talked about. There were two stories yesterday that could challenge this, alas at least one of these has been well digested in recent months so it is difficult to see why their impact on investor sentiment would also change fundamental valuations. The first is that US economic growth is heading for a technical recovery in H2. As we have often argued, a less volatile trajectory for GDP over the coming quarters would not improve capacity utilisation in the economy or private sector credit risk, and as a result demand for risk hedges will remain strong. In terms of how policy is pricing this, in spite of better GDP projections, the Fed, the BoE and the ECB have in the past month committed to more aggressive monetary stimuli for longer. The second story is about the risk of a US rating downgrade - since USD is the reserve currency of the world such an event would amount to a massive liquidity squeeze in the global economy which would imply that a US downgrade would not be a US-specific event but a “fat tail” global credit event. For all this exciting speculation, neither US 10yr yields at 3.26% nor the improved tone in risk assets yesterday suggests that the market is less willing to finance US financial stabilization or cyclical fiscal stimuli measures.

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• ECB's Weber says unless things get noticeably worse the package of measures decided until now is sufficient and the 1% level for the main refi rate adequate • France is four months ahead of other European countries in its economic recovery plan, according to minister for economic recovery • Asking prices for homes in England and Wales rose by 2.4% May, biggest monthly increase since 2003 (prev. - 1.7%), Rightmove said • Small and medium-sized US banks must raise some $24bn to meet the capital standards set by the government in its stress tests, research for the FT shows • India's SENSEX surges 10.7% to 13,479.39; trading halted for 1 hr after breaching a maximum upper limit • Japan's manufacturer's confidence improved 7 points to -69 in May, Reuters Tankan shows, further improvement of 18 points seen in Aug • South Korea plans to launch a $16.2 billion fund to buy bad loans and assets from financial institutions, a financial regulator said

 

Europe:

ECB's Weber said that ECB's current efforts to boost the euro-zone economy go far enough unless the situation deteriorates markedly. He added that unless things get noticeably worse the package of measures decided until now is sufficient. Also, the 1%  level for the main refi rate was adequate.

 

France is four months ahead of other European countries in its economic recovery plan, according to minister for economic recovery and a close adviser to President Sarkozy. He said that France had managed to speed ahead because its centralised system allowed the government to mobilise resources more quickly. http://www.ft.com/cms/s/0/c21704f8-4324-11de-b793-00144feabdc0.html

 

The Financial Ombudsman Service expects to report that complaints about payment protection insurance tripled to more than 30,000 in the 2008-9 financial year, when it publishes its annual review later this month.

http://www.ft.com/cms/s/0/8a05d18e-4306-11de-b793-00144feabdc0.html

 

ECB is pushing for an increase in the amount of information that has to be disclosed about ABS. The ECB wants more details on these securities to be passed to ratings agencies, including data on the individual loans that back them. These are mainly mortgages, but also include credit card, corporate and car loans.

http://www.ft.com/cms/s/0/056d56e6-430f-11de-b793-00144feabdc0.html

 

Central banks might need more power to oversee banks if they are to play a larger role in maintaining financial stability in the post-crisis world, a Bank for International Settlements report said. The report also said central banks should examine issues such as the make-up of policymaking bodies, their independence, voting habits and finances as their role evolves.

 

Asking prices for homes in England and Wales rose by 2.4 percent in May -- the biggest increase for the month since 2003 -- after a 1.7 percent rise in April, Rightmove said.

 

US:

Small and medium-sized US banks must raise some $24bn to meet the capital standards set by the government in its stress tests of large institutions, research for the FT shows. This news could increase pressure on many of the 7,900 US banks and could close as many as 500 more banks.

http://www.ft.com/cms/s/0/79c47ffa-4306-11de-b793-00144feabdc0.html

 

Congress will start the biggest regulatory overhaul of the US financial system in June which will bring into the open a frantic lobbying effort between banks, regulators and policymakers.

http://www.ft.com/cms/s/0/16ccfcd6-4312-11de-b793-00144feabdc0.html

 

The Obama administration's budget chief said there are signs that the free-fall in the economy seems to have halted.

 

Aus/NZ:

New Zealand producer prices fell the quickest pace on record in Q1. Producers' input prices fell 2.5% on the previous quarter (est. -0.2%), output prices were down 1.4% (est. +0.3) , official data showed.

 

Japan:

Confidence at Japan's manufacturers edged up from record low levels, improving 7 points to minus 69 in May, Reuters Tankan showed. It is seen climbing a further 18 points to minus 51 in August. Sentiment among non-manufacturers worsened 6 points to minus 44 but is seen up 9 points to minus 35 in August.

 

Asia & RoW:

India halted stock trading on the Bombay Stock Exchange was halted within seconds after the start of Sensex, as it surged 10.7%, to 13,479.39, according to the stock exchange Web site. The surge triggered the first- ever freeze in trading after breaching a maximum upper limit.

 

AIG is this week expected formally to unveil plans for a multi-billion dollar IPO of its Asian life insurance operations. Depending on market conditions, the IPO of American International Assurance is expected to fetch between $5bn and $10bn when it joins the stock market next year.

http://www.ft.com/cms/s/0/becd1840-42fd-11de-b793-00144feabdc0.html

 

South Korea plans to launch a $16.2 billion fund as early as this month to buy bad loans from financial institutions and assets from cash-strapped companies for 2009, a financial regulator said.

 

Events (London Time):

EMU    10:00    Trade balance (sa) (Mar)

USA    18:00    NAHB Housing Market Index (May)        16

 

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€       The EU will conduct aggregate stress tests of European banks, according to reports from Reuters; the results from the tests will be available for the Economic and Financial Committee's (EFC) so-called table on financial stability in September but there are no plans for a public release at this stage; the IMF repeated that Europe needs to take further steps to repair its financial sector

€       ECB's Weber: "I currently don't see the need for outright purchases of further private debt instruments…It's not our aim to just print money”

$       US Fed's Lockhart (voter): "I believe that conditions are now calmer but it is too soon to breathe easy," the Fed does not want to eliminate financial innovation "but we do want to enable policy to evolve with it…In my view the goal should be to preserve the benefits of financial innovation while eliminating any systemic risk that may come with it"

$       The US trade deficit rose 5.5% to $27.6bn in March and posted the first increase since Jul’08

$       The US monthly budget deficit was $20.9bn in April, up 113% from a surplus of $159.3bn posted in Apr’08

$       The Fed purchased $6.007bn in USTs on Tuesday; the total amount purchased is now $101.7bn since 25 March, out of a total in $300bn planned 

€       The French CPI slowed further to 0.1%YoY in April from 0.3%YoY in March; swaps show little reaction

£       UK industrial production fell at a slower pace of 0.6%MoM in March versus a revised decline of 0.8% in February (initially -1.0%); this was the 13th consecutive decline but the smallest since Aug’08

£       The UK visible trade balance improved to -£6.6bn in March versus a revised -£6.8bn in February (initially -£7.3bn), marking the smallest goods trade deficit since Apr’07

£       UK NIESR GDP estimate was -1.5% in the 3m to April versus a revised -1.9% in the three months to March (initially -1.5%)

£       UK DCLG house prices fell at a faster annual pace of 13.6%YoY in March versus -12.3%YoY in February; house prices in London led the decline at -15.7%YoY versus -12.5%YoY previously

£       UK average earnings rose at a slower 3m annualized pace of 3.0% in March versus 3.2% in February, the slowest gain in the series history since 1997

£       UK claimants for jobless benefits rose at a slower pace of 57.1k in April versus a downwardly revised 65.5k in March (initially 73.7k), pushing the claimant count rate up 0.2ppts to 4.7%; the 3m ILO unemployment rate rose 0.4ppts to 7.1% in March and was the highest since Jul'97

The Day Ahead

The UK BoE May Inflation Report (IR) and US retail sales have the potential to move markets today. The Bank approved a £50bn extension of QE last week, bringing the total size of planned purchases to £125bn. Main focus in the IR will be on the updated growth and inflation forecasts versus those last published in the February IR. Investors are likely to compare the BoE's new forecasts with those recently released by the government in the 2009/10 Budget as the market assesses the impact of monetary and fiscal policy on UK risk-free rates. The Q1 GDP estimate disappointed at -4.1%YoY in Q1 versus the February IR forecast of -3.6%YoY. The MPC statement released last week pointed to an upturn in the economic surveys and the latest money supply figures showed growth in lending to the non-financial private sector but both investment and credit growth remain considerably below levels consistent with macroeconomic stability. On the inflation front, we expect that the 2yr projection will show inflation undershooting versus the official 2% target but to a lesser extent, reflecting only a modest risk of deflation. An undershoot versus the BoE's inflation target and a possible wide forecast range would leave the door open to further quantitative easing, which would be positive for gilts which had recently moved to price in better-than-expected economic data. The BoE will offer to purchase up to £3.0bn in 2014-2019 gilts today, which would bring total gilt purchases to £57bn.

US retail sales are expected to stabilize in April, following a revised decline of 1.2%MoM in March (initially -1.1%). Anecdotal survey evidence and fiscal receipts suggest some downside risks to the data.

In policy events, US Tsy Secretary Geithner will address a community bankers’ conference at 14:00. Fed's Plosser (non-voter) will moderate a panel on the role of banks in financial markets at 15:30. Fed's Lockhart (voter) will give remarks on "The Role of Banks in Financial Markets: Policy and Practice" at 17:00. In debt supply, Portugal will sell up to €750m of 4.95%, October 2023 bonds.

Markets

Broad themes remain unchanged and market direction remains decided by investor risk sentiment, which remained in limbo yesterday as the grey shoots of the post-Lehman correction fail to shift the balance of risks in the direction of either pessimists or optimists. The leak about the European bank stress tests, if anything, subtracted directional value from the markets. While the announcement that regulatory supervision is enhanced to focus on market networks rather than just institutional risk carries positive medium-term implications, lack of policy transparency and consistency with US regulatory efforts underlines the information gap that still exists in the market about systemic risks which impairs market efficiency and drains liquidity. US and European equities see-sawed for much of the session, but the S&P managed to close above the 900 mark and the VIX ended slightly down versus Monday's close at 31.8, which lent support to Asian equities overnight. In forex, the euro corrected earlier weakness and a failed breach of the 1.37 technical barrier against the dollar to recover close to 1.369 last, extending the uptrend in place since the ECB meeting last week in a sign that risk sentiment remains resilient. However, EUR/JPY faces strong resistance above 132 mark and aside from BRL and GBP peripheral risk currencies remained largely soggy. In parallel emerging market equities have paused for breath after an outsized 9.4% gain in the MSCI EM last week, which had been the strongest gain since Dec’08. Somewhat heavy trading in government debt, further correction in IG and HV CDX and a modest uptick in currency swap spreads contributed to a further drain of liquidity. USTs are leading in the way down this morning, after an independent article published by the FT suggested that America's AAA rating must be at risk, though the move is modest (+1-2bps) and the curve is counter-intuitively bear-flattening with CDS little changed. There are two parallel forces that can slow any further improvement in financial risk premia going forward in the absence of any fresh positive intervention or greater positive surprises in the economic figures. First, volatility term structures are steepening, which will limit the market's ability to accommodate further risk and suggests that policy is seen to be affecting short-term as opposed to medium-term risks. On our part, we continue to view recent policy measures as a short-term stabilization strategy that does not substitute the need for remedial action in securitization markets – one that restores the function and tackles systemic risk. Second, producer sentiment surveys are showing positive-trending charts but the recent pace of improvement is more a reflection of the speed of the earlier decline rather than an indication of industrial sentiment in Q4’08. Furthermore, in spite of the better headlines, business investment is still declining which implies risk that the inventory cycle may disappoint over the coming quarters. Against the current excessive level of spare capacity in major economies and given the market's limited ability to accommodate long-term risk (as per first point above) a solid recovery in business investment looks some way off.
 

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