European Bonds Plunge; Preliminary GDP Figures Higher in Europe

In equity news overnight, Hochtief reports Q1 pretax of €103.3M, above estimates of €95.6M. Revenues were in line with expectations, while net income was slightly ahead of expectations of €26.5 at €32M. The company reaffirmed its 2008 revenue and earnings guidance. Barclays (BCS) reported a Q1 net loss of £1.0B relating to credit market turbulence, adding that writedowns include a £700M gain for valuation of notes issued by the company. The company said that exposure relating to RMBS securities were actively managed and declined over the first-quarter.

In the newspapers, the Wall Street Journal reported that Embarq (EQ) will end its wireless resale deal with Sprint (S) in 2009. Under the agreement, Embarq sold its branded wireless service using Sprint's network. The WSJ notes that sales results from the partnership between the two companies were less than expected. The Wall Street Journal was cautious on shares of Nomura (NMR) overnight, noting that some analysts believe that the large FY loss the company posted last month to address its exposure to risky debt does not mean it has put the worst behind it. According to press reports efforts to sell Germany’s IKB [IKB.GE] have faltered. The article added that BayernLB and JC Flowers will not bid for IKB. Citing sources, the Wall Street Journal wrote overnight that GE (GE) is seeking buyers for its appliances operations, and has hired Goldman as an advisor. The article speculates that the unit could be worth $5B-$8B.

In energy news overnight, UBS raised its 2008 average oil price forecast by 32% to $115/barrel. UBS also raised its 2009 average oil price forecast by 54% to $120/barrel. Sanford Bernstein raised its 2008 average oil price forecast by 11.1% to $100. The Saudi oil minister said overnight that oil prices are becoming more connected with financial markets, pointing out that recent developments in financial markets added to oil price volatility.

In new supply overnight, the AFT sold €4.6B in September 2010 3.75% BTANs with an average yield of 4.11% and a bid-to-cover of 2.4x. The DMO sold £2.5B in 5.00% March 2018 gilts with an average yield of 4.912%, and a bid-to-cover of 2.05. The auction had a yield tail of 0.3bps. In related news, the Financial Times commented overnight on Wednesday's sharp rise in dollar Libor due to concerns that its calculation may be changed. The article notes that the BBA will submit a report on May 30 and the report will be used as the basis for discussion about whether the index needs to be changed. One possible change would be to ask banks what rate other banks are borrowing at. Other possible reforms could include changing the time at which the BBA calculates the dollar Libor, to ensure that this is set when American markets are open or expanding the number of US banks that submit quotes.

In currencies, the EUR/USD continued to consolidate in the upper portion of its May trading range. The above expectations q/q rise in both German and Euro-Zone Q1 GDP data aided the Euro throughout the session. Dealers noted that hourly resistance is seen at the 1.5550-level with Euro buy stops building above that area. The Euro was tempered by softer than expected core CPI data, which had the lowest reading in almost 18 months. Overall the Euro was firmer against the major currencies with the EUR/GBP re-approaching the 0.80 area for fresh 3-week highs. Commodity currencies were stronger but off their best levels in the European session. The USD/CAD held above parity at 1.0030, while AUD/USD consolidated in the mid 0.93 area.

In central bank speak overnight, the Fed’s Yelle said that the Fed funds rate has come down far enough. The Spanish finance minister said overnight that Euro-Zone inflation will probably peak if oil comes down, adding that the strong Q1 GDP in Germany may offset weakness elsewhere. Furthermore Solbes said that economic risks have materialized in Spain, adding that growth is seen below potential in the coming quarters. The EU's Almunia said overnight that harmonized inflation of 3.3% is higher than desired. Almunia added that if there are no more shocks HICP will drop towards 2%. Almunia also noted that Euro area potential growth is too low, bus said that it is not the Euro’s fault. UK Prime Minister Brown said overnight that he hopes that the BoE will be able to cut interest rates. The ECB echoed Trichet’s May 8^th post-rate decision comments in its May monthly inflation report noting that members see upside price risks, and adding that Euro-Zone fundamentals remain sound. The ECB also updated its staff projections, cutting its 2008 GDP forecast to 1.6% from 1.8%, and its 2009 GDP forecast to 1.6% from 2.0%. The ECB also raised its 2008 CPI forecast to 3.0% from 2.5%, and its 2009 forecast to 2.2% from 2.0%.

On the data front, the q/q reading on preliminary Q1 GDP in Germany was much higher than expected, reaching its highest level since Q2 of 1996 at 1.5%. GDP was bolstered by both domestic demand, and export demand, as well as higher consumption and an increase in gross capital investment. Final readings on April CPI figures were less exciting as results were in line with the preliminary reports. In the Euro-Zone advanced Q1 GDP beat out expectations for the m/m and y/y readings. Headline CPI readings for April were in line with expectations, however focus fell upon the core reading, which was below estimates of 2.0%. Core CPI declined to 1.6% in April, its lowest level since January of 2007.

Looking ahead, economic data kicks off with the weekly jobless claims and continuing claims at 8:30 et, which will be accompanied by May empire manufacturing data. Shortly thereafter, at 9:00 et, March Net TIC flows data will be released, followed at 9:15et by April industrial production and capacity utilization. At 10:00 the Philadelphia Fed index will be released, followed by the May NAHB housing market index at 13:00 et. In Fed speak, the Fed’s Bernanke is due to speak about banking risk management in Chicago at 9:30 et, while the Fed’s Mishkin is due to speak about asset price bubbles in Philadelphia at 19:00 et. On the earnings front notables expected in the pre-market today include Blockbuster (BBI), Blackstone Group (BX), and JC Penny (JCP).