European Market Update

Markets Lower in Thin Volume as US Goes on Holiday

ECONOMIC DATA

FR May Central Government Balance: -€50.1B v -€45.0B prior

SP May Industrial Output WDA: -5.5% v -0.8%e || Prior revised from -0.2% to 0.2%
SP May Industrial Output NSA: -7.3% v 11.3% prior || Prior revised from 11.3% to 11.8%

GE May Factory Orders: M/M -0.9% v 0.8%e || Prior revised from -1.8% to -1.7% |||| Y/Y -2.0% v 2.0%e || Prior revised from 15.0% to 15.2%

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

The ECB's Mersch said overnight that an ECB rate hike will not throttle growth, adding that inflation expectations are mounting and pose a dangerous situation. Mersch added that he cannot see any evidence of credit shortage in Europe. Mersch later said that ECB rate increase lowers inflation expectations. Mersch noted that inflation expectations are rising and that it is dangerous to the economy.

In equity news overnight JP Morgan said in a note sent to clients that recent selling of European insurers is overdone. An analyst at Goldman Sachs said overnight that European banks may need to raise €60B, and may need to raise €90B if losses widen. An analyst at UBS said overnight that he sees a 5,100 "value floor" for the FTSE 100. UBS [UBSN.SZ] reiterated overnight that there is no need to raise new equity. Goldman Sachs cuts the European Basic Resources Sector to Neutral from Buy. UBS said that they see Q2 at or slightly below break-even, and guided Q2 tier 1 capital ratio at 11.5% or higher. The bank noted that Q2 net new money was negative but added that net new money improved in May and June. Furthermore UBS sees Q2 loss in its investment banking unit, and noted that writedowns in particular are linked to monoline exposure. Bradford and Bingley [BB.UK] announces overnight that it intends to increase the size of its rights issue to £400M. In related news Moody's downgraded Bradford And Bingley's debt ratings to Baa1. Moody's noted that long term ratings remain under review for possible downgrade.

On the speaker front the ECB's Weber said overnight that the ECB's rate hike was not preventive, noting that price risks have materialized. Weber said that the ECB does not have a forex target but does take forex it into account, adding that the ECB cannot define a Euro forex pain barrier. Weber asserted that German firms remain competitive despite the Euro FX rate. Furthermore Weber said that the ECB hike could accentuate an economic slowdown, and reiterated that central banks must act against second round effects.

The ECB's Trichet reiterated overnight that the ECB raised rates to fight developing price risks, adding that current interest rates will help to deliver stable prices. Trichet said that the ECB cannot influence oil price and current inflation, adding that increase in oil and commodity prices create a demanding environment. Trichet reiterated that second wage price effects must be prevented, and said that he expects financial market correction and volatility to continue. Trichet also reiterated overnight that Q2 economic growth will be well below that of Q1.

The ECB's Liebscher said overnight that price risks have increased and are more visible than in the past. Liebscher echoed Trichet noting that the ECB does not have a bias, and does not pre-commit on monetary policy. Liebscher said that he see moderate but ongoing growth in the EU, adding that the ECB's rate hike will not hurt the European economy. Finally Liebscher said that he cannot rule out a further rise in inflation.

The German Finance Minister said overnight that he sees downside risks to growth, adding the he does not see an economic downturn. The finance minster added that he sees moderate growth in Germany over the coming years.

The Bank of Spain said in its quarterly economic bulletin overnight that Q2 Euro Zone date points to a continued slowdown in economic activity. The bulletin said that the correction in Spanish construction has intensified, especially in the housing sector. Furthermore the bulletin said that wage increases are growing at a faster rate in Q1 of 2008. Noting that the comments were made before the ECB's July 3rd meeting, the bulletin also said that the ECB is on high alert.

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