European Market Update

Euro-Zone PMI services suggest a stall in confidence complemented with its Retail Sales data worse than expected

ECONOMIC DATA

(SP) Spain May Industrial Output NSA Y/Y: -22.3 v -28.4% prior; WDA Y/Y: -20.5 v -16.4%e

(HU) Hungary April Final Trade Balance: € v €429.7M prior

(SP) Spain June Services PMI: 41.2 v 39.1 prior

(SZ) Swiss June CPI M/M: 0.2% v 0.1%e; Y/Y: -1.0% v -1.1%e

(IT) Italy June PMI Services: 42.3 v 42.9e

(FR) France June Final PMI Services: 47.2 v 47.5e

(GE) Germany June Final PMI Services: 45.2 v 44.3e

(EU) Europe June Final PMI Services: 44.7 v 44.5e; PMI Composite: 44.6 v 44.4e

(UK) UK June PMI Services: 51.5e v 51.7 prior
(UK) UK June Official Reserves (Changes): No expectations v $2.1B
(UK) BoE Q1 Housing Equity Withdrawal: -£9.0Be v -£8.0B prior

(EU) Euro-Zone May Retail Sales M/M: -0.4% v -0.1%e; Y/Y: -3.3 v -2.7%e

(MA) Malaysia May Trade Balance (MYR): 10.0B v 8.9Be

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

In equities news overnight: BNP Paribas [BNP.FR] To form a fund management partnership with Greece's Piraeus.The companies plan to set up joint ventures in both Greece and Switzerland and expect to complete the transaction some time in Q4 || Deutsche Telekom [DTE.GE] FT article that the company's executives would prefer an asset-swap deal with any possible bidder for its T-Mobile UK unit. The executives favor swapping T-Mobile for an asset in another country as opposed to an outright sale of the unit. || Autonomy [AU.UK] Awarded $15M contract with major global bank || Vallourec [VK.FR] stated that 65% of its dividend would be paid in stock.- The option of receiving the dividend by delivery of shares generated strong interest amongst shareholders. The subscription rate for this option was close to 65% || F&C Asset Management [FCAM.UK] Friend'd Provident [FP.UK] Received court approval for F&C Asset Management demerger. The Demerger has been structured as a return of capital to Shareholders by Friends Provident Group. || Bank of Ireland [BKIR.IR] Provided an interim statement in which economic environment remained difficult and trading conditions were challenging. Keeping bank stability remained the primary management objective. || Balfour Betty [BBY.UK] Provided trading statement in which the YTD trading performance continued to be in line with expectations. Continue to have a high-quality order book, which, at the half year, is expected to be broadly in line with the £12.8B reported en the end of last December.Net cash in excess of £200M for the first six months of 2009. || Strabag [STB.GE] withdrew from purchase agreement with Mexico;s Cemex [CX] in Austria, Hungary. Strabag stated that it quit the deal because it was unable to reach anti-trust approval in Austria by June 30 deadline || Man AG [MAN.GE] Awarded 60 bus order || Tui [TUI1.GE] Hapag-Lloyd unit might seek additional government aid according to Frankfurter Allgemeine Zeitung (FAZ). The article cited 15% holder Klaus Michael Kuehn. || BMW [BMW.GE] CFO commented that it would hold intensive talks with Daimler regarding cooperation of the upper car segment. He also stated that he was very certain that the company will not seek gov aid from SOFFIN for its financial services business ||

Speakers: Japan official reiterated view that USD would remain key global currency and that other countries should support this view. G20 might debate USD reserve status on the sidelines of the G8 summit next week ||| ECB's Noyer commented that directing the economy in the current uncertain environment would be a challenge. Financial development in surplus countries will help reduce probability of future bubbles but the banking crises might lead to long slumps if not cured fast. He reiterated the primary, dominant target of monetary policy should remain price stability

|||Polish Central Banker Noga commented that he saw no further room for interest rate cuts this year due to inflation forecasts. He expected June inflation to stay at 3.6% y/y reported in May but believes it will pick up to 4% in Dec. Previouse Noga wanted inflation at 3.5% for any additional rate cut. He stressed need to peg Zloty to Euro 'as soon as possible' and saw 'optimal' entry to Euro currency peg in 2011, euro adoption 'optimal' in 2014. He expected Zloty to trade below 'equilibrium rate'; equilibrium rate 'slightly' above 4 zloty/eur || In contrast Poland Fin Ministry stated that it expected the Central Bank to continue with its easing policy and cut rates to 3.0% by the end of 2009. It also saw Polish unemployment rising to 12.5% at year end from the 10.8% reported for May

||| SNB's Hildebrand commented that the global economy was no longer in 'free fall' but the Swiss economic recovery could be slower than in other regions. Swiss economic recovery might lag behind a rebound in the rest of the world because the country was hit relatively late |||Indonesia Central Bank guided its Q2 GDP growth in a range of 3.7%-4% y/y and year end inflation at between the 5-7% area. ||| South Korea's Fin Min Yoon commented that it was not the time to implement 'exit strategy' ||| Philippine Central Bank also commented that it did not see need to 'exit' easier monetary policy at this time || Bank of Spain (BOS) commented that the Spanish and Euro-zone economies contracted in Q2 but at a slower pace. It noted that the ECB considers interest rates are appropriate at this time. The BOS added that both medium and long term inflation expectations were anchored.

In Currencies: The USD encountered some retracement against the European pairs during the session following the gains on Thursday in the mist of the increase in risk aversion after the US payroll report. The EUR/USD recovered from the Asian lows of 1.3950 to hover around the 1.40 level throughout the session.. Japanese official reiterated the opinion that the G8 was unlikely to debate the USD reserve stat

the CHF was weaker on continued concerns that the SNB might intervene in the markets again following its inflation data. USD/CHF approaching the 1.09 level while EUR/CHF recovered from session lows of 1.5180 to move towards 1.5250 as the NY morning approached.

In Energy: IEA's Tanaka commented that China's state and commercial stocks of crude oil were equivalent to 86 days of net imports. The Figure was only 4 days short of the amount needed to join the International Energy Agency. The IEA would welcome China as an equal partner in the organization but was unsure if China would ever join || OPEC President Vasconcelos commented that it was 'Necessary' to build market stability; 'satisfied' with current prices of oil and added that prices between $68-71/bbl were 'appropriate'. || Poland might agree to purchase Russian gas through 2035 accorded to Polish press reports. ||

Credit Crisis: S&P analyst commented that Hungary's risk remained 'skewed to the downside' but saw a number of encouraging developments

Wider budget deficit would undermine investor confidence. Country outlook remained negative, citing that the debt burden was set to rise to 84% of GDP and the next general elections might derail economic policy || S&P affirmed Philippines' sovereign rating with the outlook Stable. It did express come concern of the country's revenue. The long-term foreign currency debt remains at 'BB-' while the long term local currency debt stands at 'BB+' || According to the head of China's National Energy Administration, the Chinese gov't is drafting a renewable energy stimulus plan

Reminder: Back on June 25th, it was reported that China may launch a stimulus plan for the domestic alternative energy industry as soon as July - Shanghai Securities News

NOTES

US celebrates its July 4Th Independence Day holiday

Seven more U.S. Banks Seized by FDIC on Thursday

Euro-Zone retail sales were worse than expectations

Europe PMI services data shows stalling in confidence

Looking Ahead US holiday with bond and equity markets closed

10:00 (TU) Turkey Jun Consumer Prices M/M: 0.1%e versus 0.6% prior; Y/Y: 5.7% e versus 5.2% prior

10:00 (TU) Turkey Jun Producer Prices M/M: 0.1%e versus -0.1% prior; Y/Y: -2.6% e versus -2.5% prior

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