RANsquawk's  Instablog

Across the space of just two weeks, participants have witnessed a significant shift in the stances of both central bankers and governing powers from East to West. However, markets have not found solace in the proposed actions, seeing serious downside as the central bank actions fall short of expectations, with the sentiment being compounded by yet another disappointing Non-farm payrolls report.

Looking ahead in the week, data from China will be a focal point for a number of the riskier assets, as the Chinese government are set to release their Q2 growth figures. With Chinese PMIs coming in particularly soft in recent months, many investors now regard the Eastern Dragon's economy with marked apprehension. This has prompted a number of institutions to speculate whether last week's move by the PBOC was in fact pre-emptive, as the bank's Board attempt to offset any perceived weakness in the numbers. With a number of both state- and central bank-run publications in the country opining for additional cuts to banks' reserve requirements, markets will be clinging on to any further pieces along the same vein from the Chinese press. With the PBOC cutting rates twice in the space of a month, this week's release of money supply figures will also be closely watched for the nature of the transmission of easing. This has been factored into expectations for June, reflected in the expectations of an uptick in liquidity since the cut in early June.

Bond auctions this week are towards the lighter side in terms of quantity, but Friday's Italian issuance of medium- long BTPs will, again, be used as a fresh litmus test on sentiment towards the Mediterranean, as markets continue to look for any signs of faltering in the stance of the hawkish North-European states on the topic of buying in the secondary bond markets. This week's Eurogroup meeting should see further comments on the issue, but few are expecting a softening in the stance of Finland, the Netherlands and Germany. A more likely outcome will be another dose of reality for the flagging periphery, with even the Greek finance minister commenting that he expects a hard-time this week as his country falls behind on their austerity targets.

For US participants, the key event of the week is likely to be the release of the FOMC's minutes wherein the board selected to extend their Operation Twist program. Upon the publication, markets will be keenly looking out for any signals from the Fed on their long-awaited, but cruelly-denied QE3, which continues to be heavily priced in. As such, any indication of a delay in further asset purchases or a lowering in the likelihood of assistance from the Fed will likely prompt strong risk-off sentiment, compounding the effects observed time and again when the Fed has refused to deliver.

The ongoing LIBOR scandal is likely to intensify this week, as the BoE's deputy governor Tucker is set to take the stand today in front of the Treasury Select Committee, and will likely receive a grilling from the panel on his relationship and connections to Barclays' decision to depress rates. Although much of the damage has been done on a number of UK banks' share prices, the scandal remains prevalent as source comments minutes before Friday's close last week indicated that a number of institutions are still yet to be investigated, naming Deutsche Bank specifically.

Elsewhere on the equity front, US earnings season is set to kick-off once again with Alcoa due to report today, but the focus will be on Friday's releases, which sees JP Morgan report for the first time since their 'London Whale' difficulties, as well as tech titan Google.

1. Cautious trade noted ahead of today's Non-farm payrolls report; asset classes remain relatively rangebound.

1. German Industrial Production (May) M/M 1.6% vs. Exp. 0.2% (Prev. -2.2%, Rev. -2.1%)

1. Spanish 10-yr yield breaks 7% to the upside, erasing all moves made following last week's EU summit.

1. RANsquawk European Morning Briefing Video: http://youtu.be/yU4DctyYsoc

Market Re-Cap

European equities are showing no solace from yesterday's action from both Eastern and Western central banks, and are seen lower at the North American crossover. Risk-aversion is observed as the theme of trade so far today, with health care stocks making defensive gains ahead of the key Non-farm payrolls report due at 1330BST/0730CDT.

Newsflow this morning has been relatively light, with the only data point of note being German industrial production comfortably beating expectations, although analysts have noted that this uptick may be a rebound from the previous month's poor figure.

In the fixed income market, French, Dutch and Austrian bonds are seen outperforming ahead of next weeks redemption and coupon payment flows, with all respective 10-yr government bond yield spreads sharply tighter on the day against the German counterpart. This is contrasted with underperformance in the peripheral securities, with the Spanish yield breaking 7% to the upside this morning. Earlier market talk of a Spanish sovereign downgrade may have kept investors on their toes and cautious of the country's bonds.

Despite yesterday's rate cut from the ECB failing to boost risk appetite, the easing has been reflected in today's 3-month Euribor fix, recording a steep fall to 0.549% from 0.641% today.

Looking ahead in the session, price action looks to be limited ahead of the key jobs data from the US this afternoon, where a number of major institutions such as Goldman Sachs have revised up their estimates following yesterday's forecast-beating ADP data.

Asian Headlines

Japanese finance minister Azumi has said the Japanese government could run out of funds in October without a bond bill passage, and Japan would need to strictly curb government spending from September if the bond bill is not passed. (Newswires) Azumi reiterated that the government is prepared to respond appropriately to speculative FX moves.

Japanese PM Noda has said JPY strength is one-sided and does not reflect the economic fundamentals. (Newswires) IMF's Lagarde has said JPY strength and the effect of the European debt crisis on Japanese exports pose the greatest threat to the Japanese economy.

China's economic growth could slow to below 7.5% in Q2 if industrial production growth in June was at the same level as May's 9.6%, according to a government think tank economist. (Shanghai Securities Journal)
Chinese CPI is forecast to have risen 2.4% Y/Y in June from 3.0% Y/Y in May and to have risen 2.9% in Q2, according to an economist with the China Academy of Social Sciences.

The PBOC still needs to inject liquidity into the market so that banks can lower their lending rates, despite the rate cut, according to an economist with the State Information Center. (China Securities Journal)

Chinese industrial production growth likely bottomed out in Q2 of this year and is to improve at the end of Q3 and into Q4, according to two economists with the Ministry of the Industry and Information Technology. (China Securities Journal)

Global Headlines

According to WSJ analysis, analysts and investors have expressed doubt as to whether global easing is to help the economy as global central banks are now constrained by zero rates and unconventional tools. (WSJ)

US Headlines

According to WSJ analysis, the Fed could follow in the footsteps of other global central banks if today's jobs data is weak. (WSJ)

US Monster Employment Index rose to 153 in June from May's 147, up 4.8% Y/Y. (Newswires)

EU & UK Headlines

Germany's Economic Ministry wants the ESM to be part of the Europe-wide banking regulator, according to an internal ministry paper. (Frankfurter Allgemeine Zeitung) The ministry wishes to transfer operational supervision of banks to the ECB, but wants to entrust the ESM with tasks such as licensing, breaking up or restructuring banks. The report justifies the position as it would have the decisive advantage that sovereign regulation and financing would lie in the same hands.

Moody's have said last week's EU summit measures are to reduce the likelihood of shocks, but at a cost. (Newswires)

The Italian government have approved EUR 4.5bln in spending cuts for 2012 aimed at slashing the size of Italy's bloated public sector and delaying a new tax increase until after the first half of 2013. (Newswires)

Portugal's government has suffered a major setback as a national court rules it cannot apply wage cuts in 2013 and 2014 as the government had wished in order to reach deficit targets. (Newswires) The Portuguese PM has said he will look for new budget measures for 2013.

German Industrial Production (May) M/M 1.6% vs. Exp. 0.2% (Prev. -2.2%, Rev. -2.1%) (Newswires)
German Industrial Production NSA (May) Y/Y 0.0% vs. Exp. -1.2% (Prev. -0.7%, Rev. -0.6%)

Equities

European equities trade lower ahead of the key jobs release later today, with the price action appearing relatively muted as participants await 1330BST/0730CDT. Risk aversion is evident in financials making losses and health care seeing benefiting from defensive positions. DAX future did experience a minor uptick on the release of an expectation-beating industrial production figure, but failed to make any significant progress higher. US stock futures are seen moving in tandem with their European counterparts, indicating a lower open on Wall Street today.

In individual equities news, smaller French stock Arkema are seen making significant gains following the stock being highlighted on FT Alphaville. FT Alphaville highlighted that the company is reportedly subject to a number of bid approaches, following which the company saw strong buying, moving higher by over 12% in total following the headlines. Arkema is last seen trading higher by over 15%.

French carmaker Peugeot are seen heavily underperforming today following reports from French press that the company's H1 sales fell by 13% as demand for their vehicles slumped in the first six months of this year. (La Tribune) At the midpoint of the European session Peugeot shares are seen lower by 6%.

FX

EUR/USD trades range-bound with quiet FX markets observed ahead of the non-farm payrolls report. The pair is seen marginally lower, carrying across yesterday's weakness from the ECB rate cut. Grinding higher in the Spanish 10-yr yield throughout the session has weighed upon on the pair also. Any significant upside may be capped amid unconfirmed market talk of offers at the 1.2400 mark, and to the downside, yesterday's low has held at the 1.2364 mark keeping the pair within a tight range throughout the European morning. Notably large option expiries are seen at the 1.2150 level, however the upcoming redemption flows from France, Netherlands and Austria are likely to keep the pair from any major moves lower, which may nullify the effects of this expiry. Heading into the data, focus will be on the USD as the primary influence on the pair.

With Japanese PM Noda and Finance Minister Azumi once again highlighting their concerns with JPY strength, USD/JPY is seen lower on the day. Daily cloud range of 79.22-80.56 may be influential for the currency pair as we progress through the session and any major downside may be limited by market talk of bids at 79.50, although this remains unconfirmed. The pair currently trades between two touted option expiries for the 10am (1500BST) NY cut at the 79.75 and 80.00 levels, which may prove magnetic later in the session.

Commodities

WTI and Brent crude futures are seen lower ahead of the key US Non-Farm Payrolls report, as global central bank measures announced yesterday fail to put a cap on risk-aversion in today's session. EIA Natural Gas Storage data is also due for release today at 1530BST/0930CDT - (Jun 29) W/W Exp. 43, Low 34, High 52 (Prev. 57).

Oil & Gas News

1. The CME have boosted their margins on NYMEX crude oil and natural gas futures contracts as of the close of business on July 9th. The initial margin for speculators in light, sweet crude futures for the month nearest to expiration will increase to USD 6,885 per contract from USD 6,210. The initial cost to speculators in natural gas will rise to USD 3,105 per lot, from the current USD 2,835.
2. The Norwegian Oil Industry Association has said it has had no formal contact with labour unions as it prepares to shut down oil production off the Norwegian coast. An association spokesman has said if the unions do not accept their offer, the association hopes the government will intervene before the lockout. According to BP analysis, the lockout has been planned to force the Norwegian government to intervene as it did in 1997, 2000 and 2004.
3. Barclays have cut their 2012 forecast for WTI by 8.6% to USD 96/BBL and have cut their Brent forecast by 5.8% to USD 113/BBL.
4. A rise in oil prices of around USD 10/BBL would trigger a 'hard destruction' of demand and make governments consider releasing emergency reserves, according to Petromatrix analysis.
5. Libya has cut their oil output to around 1.3MBPD from around 1.6MBPD for security, storage and other reasons, according to the national oil company.
6. Chinese gasoline and diesel prices may be reduced by around CNY 400 per ton on July 11th, according to Xinhua-obtained system data.
7. A major oil terminal in Ras Lanuf, Eastern Libya has been shut down due to protests over the allocation of seats in a national assembly due to be elected on Saturday, according to a terminal supervisor.
8. Saudi Arabia's crude oil shipments to the US in June were near their highest levels since 2008, despite a serious glitch at the Motiva refinery in Texas.

Geopolitical News

1. US Secretary of State Clinton has said Russia and China must pay a price for supporting Assad's regime in Syria.
2. An increasing number of Iranian crude tankers have signalled that they are bound for China, in an indication that Iran remains defiant against Western sanctions and may be reversing its current strategy of storing crude at sea.
3. Iran will see its July oil exports more than halved from regular levels seen last year because tough new Western sanctions are stifling flows and costing Tehran more than USD 3bln in lost revenue per month. In related news, Iran and Syria have resumed working together to fight Western sanctions on their oil as shipping records showed two Iranian vessels delivered diesel to Syrian ports over the past week.
4. The Swiss government will not match the EU and US' sanctions on Iran, deciding on its own set of measures that would exclude a ban on trading the Iranian oil.

Last Price taken at 1232BST

**Note:

Dollar Index July options expiry (2000BST/1400CDT)

You can now follow real-time news headlines on the move with the new RANsquawk app available to download for free on the Apple App store or at ransquawk.com/mobile_app for Blackberry and Android users.

1. China's PBOC cut their 1-year deposit rate by 25bps to 3%, cut their 1-year lending rate by 31bps to 6%; however keeps Banks' RRR on hold.

1. ECB lowers its benchmark interest rate to 0.75% from 1.00%, lowers its marginal lending rate to 1.50% from 1.75%, lowers its deposit rate by 25BPS to 0%.

1. BoE boost their QE program by GBP 50bln to GBP 375bln; alongside expectations.

1. RANsquawk European Morning Briefing Video: http://youtu.be/B8YGSq2GEVQ

Market Re-Cap

After a quiet morning in Europe, widespread central bank activity has provided a jolt across the asset classes. Once again, the BoE's rate announcement was overshadowed by the Chinese central bank cutting their benchmark borrowing rate, giving an immediate lift to risk appetite. The largest moves were seen in European and US equity futures, with the e-mini S&P moving around 5 points higher and DAX futures moving 20 ticks to the upside. Along with the BoE announcement, gilt futures moved 4 ticks lower with Bund futures falling 10 ticks, before paring most of the move. GBP/USD gapped higher, making gains of around 20 pips in the immediate reaction. Upon the release, some confusion was observed as to whether the PBOC had cut their bank's Reserve Requirement Ratio. In the wake of the release, as it became clear the bank's RRR was staying put, an immediate paring of the knee-jerk reaction was observed.

Following the ECB cutting interest rates, notably with the deposit rate to 0%, further market reactions were seen across asset classes with the Euribor strip seeing volatility, with a knee-jerk reaction to the downside on the announcement that the main refi rate was cut in-line with expectations to 0.75%, with an immediate retracement and move to the upside on the news that the ECB cut their deposit rate to 0%. EUR/USD moved quickly to session lows, seeing weakness across the board, although initial volatility was seen in the pair. The 2yr German Schatz initially spiked to the upside, printing a fresh high at 99.930, and Bund futures now moved towards highs, with gains in shorter dated European paper.

As the dust settled following the flurry of central bank actions, the gains made in equities have been largely pared, as the easing measures were alongside expectations. Additionally to this, the new Greek finance minister has reignited caution towards the country by commenting that the Greek program is off track in some respects, expecting a hard time at the upcoming Eurogroup meeting.

Asian Headlines

China's PBOC have cut their benchmark interest rates; cuts 1-year deposit rate by 25bps to 3%, cuts their 1-year lending rate by 31bps to 6%, effective July 6th. (Newswires)

BoJ's Shirakawa has said the Japanese economy has started to pick up moderately, but the tension in the global marketplace continues, primarily revolving around the European debt crisis. The BoJ have upgraded all 9 regional economies in Japan for the first time since October 2009. The BoJ commented that most regions are seeing a pickup or mild recovery in their economic conditions. (Newswires)

China's local governments should not return to relying on the property sector to spur economic development, according to central-bank run press. The report suggests that local governments should abandon the idea of loosening property controls. (Financial News)

US Headlines

US Republican candidate Romney has said that the US healthcare law's penalty is a tax, breaking with one of his top aides and further muddling the lines between the Massachusetts healthcare plan he championed and the federal version he opposes. (WSJ)

US Challenger Job Cuts (Jun) Y/Y 37.6K vs. Prev. 61.9K (Newswires)

EU & UK Headlines

ECB lowers its benchmark interest rate to 0.75% from 1.00%, lowers its marginal lending rate to 1.50% from 1.75%, lowers its deposit rate by 25BPS to 0%. (Newswires) Attention now turns to Draghi's press conference set for 1330BST/0730CDT.

Following the ECB cutting interest rates, notably with the deposit rate to 0%, further market reactions were seen across asset classes with the Euribor strip seeing volatility, with a knee-jerk reaction to the downside on the announcement that the main refi rate was cut in-line with expectations to 0.75%, with an immediate retracement and move to the upside on the news that the ECB cut their deposit rate to 0%. EUR/USD moved quickly to session lows, seeing weakness across the board, although initial volatility was seen in the pair. The 2yr German Schatz initially spiked to the upside, printing a fresh high at 99.930, and Bund futures now moved towards highs, with gains in shorter dated European paper.

The BoE keeps interest rates unchanged at 0.50% as expected; boosts its asset purchase target to GBP 375bln from GBP 325bln, as expected. (Newswires) The BoE also chose to leave their QE program maturity buckets unchanged. Alongside the rate release, the BoE have said inflation is likely to edge down in the near term, and the scale of the QE programme will be kept under review. Some market participants were speculating an increase in long-end purchases; 30y Gilts have moved lower by almost 3 points and 2/30's are steeper by 10BPS

The new Greek finance minister has said the Greek program is off track in some respects, adding that Troika lenders have told him he will have a difficult time at the Eurogroup meeting on Monday. (Newswires)

Greece has failed to deliver on its reform promises, as signals that tax collection has slipped mean that Greece looks likely to miss its deficit targets this year, and as a result, the Troika may demand some EUR 2bln worth of additional spending cuts, over or above those already taken in 2012 according to source. (Newswires) Greek PASOK leader Venizelos has said Greece is keen to tap the ESM/EFSF to recapitalize local banks, and the funds should not be added to national debt. Venizelos added that PSI holdouts must be dealt with immediately.

The Netherlands have reiterated that they are hesitant regarding secondary market bond purchases and are to judge the secondary market bond purchases case by case. (Newswires)

Spanish Bond Auction Results
-Spain sells EUR 1.24bln 4.00% Jul'15 bonds, bid/cover 2.28, Prev. 3.18 (Yield 5.086%, Prev. 5.457%)
-Spain sells EUR 1.01bln 4.25% Oct'16 bonds, bid/cover 2.56, Prev. 2.56 (Yield 5.536%, Prev. 5.353%)
-Spain sells EUR 747mln 5.85% Jan'22 bonds, bid/cover 3.18, Prev. 3.29 (Yield 6.430%, Prev. 6.044%) (Newswires)

German Factory Orders SA (May) M/M 0.6% vs. Exp. 0.0% (Prev. -1.9%, Rev. -1.4%) (Newswires)

German Factory Orders NSA (May) Y/Y -5.4% vs. Exp. -6.0% (Prev. -3.8%, Rev. -3.4%)

Equities

With the Chinese central bank cutting their benchmark interest rates, the basic materials sector is leading the European bourses higher at the midpoint of the European session, as future commodities demand receives a boost. A strong uptick in risk appetite was observed after China cut rates, however the gains were pared once the dust settled and markets came to the realization that the PBOC had kept the banks' RRR on hold. The German DAX is seen outperforming its partners, with positive factory orders data providing a lift. The subsequent ECB rate cut provided equities with another dose of buying, however news from Greece that they are off track on their reform program has weighed upon equities, pushing stock futures on both sides of the pond back towards the unchanged level.

In individual equity news, German carmaker Volkswagen is observed as one of the strongest performers today following news that the company is to acquire the remaining stake in Porsche for EUR 4.46bln in cash plus one ordinary share, and agree to accelerate the creation of Integrated Automotive Group. Volkswagen's CFO has reiterated the company's 2012 earnings outlook adding that he sees good development in Q2. (Newswires) At the midpoint of the European session, Volkswagen shares are seen higher by over 7%.

FX

Despite a quiet start to this mornings trade, EUR/USD and FX markets as whole have seen recent volatility as China made the move to cut interest rates, surprising markets shortly before the less surprising Bank of England announcement. A swing in the USD was echoed in EUR/USD price action, with a knee-jerk reaction on the back of a headline that China has also cut their RRR, although with a correction then run that it was just an interest rate cut this price action pared. Upon the ECB release, EUR/USD rapidly moved to session lows, printed at 1.2434.

GBP/USD has, like EUR/USD, has seen volatile trade. Following the Bank of England announcement where they keep interest rates on hold, but boosted the APF by GBP 50bln, GBP actually saw strength as this came in in-line with expectations. The pair gapped higher by around 10 pips at the announcement, but this also attributed to the surprising action by China, moving asset classes globally.

AUD/USD has been supported by the Chinese rate cut, with gains of around 50 pips in total, and AUD strength seen across the board. This mornings gains have also been buoyed by gains in crude futures, with Brent USD 2.40 higher as the strike in Norway continue, and news that Statoil are preparing to shut down Norwegian oil output amid the strike action.

Commodities

After spending much of the Asian session in negative territory, WTI and Brent crudes have been observed grinding upwards throughout the European session as the Norway Industry Association calls for a lockout of Norwegian oil workers. Participants now look ahead to the DOE inventory numbers; delayed by one day due to yesterday's US market holiday.

Oil & Gas News

1. The Norway Oil Industry Association has said the Norwegian pensions strike conflict is deadlocked, and has called for a lockout. As such, 6,515 oil workers are to be locked out of work places from July 10th.
2. Statoil are preparing to halt production on the Norwegian continental shelf after notice of a worker lockout. The shortfall in production will be around 1.2MBPD.
3. Saudi Arabian Oil Co. has raised the differentials used to set official selling prices for August of its main grades to Asia and boosted them for medium and heavy crudes to the US.
4. Kansai Electric Power Co., which supplies Japan's second largest metropolitan area, may cut its crude consumption by more than half as it resumes two nuclear reactors to ease the threat of power shortage. The cut in crude use could amount to up to 60,000 BPD.
5. According to Mirae Asset Securities, Brent crude's rebound to USD 100/BBL is sustainable given China's record high import demand and Saudi Arabia cutting export volumes.

Geopolitical News

1. India is using EUR to clear most of its purchases of Iranian oil through a Turkish bank because of hurdles in making INR payments, according to three people with knowledge of the transactions.
2. Iran looks increasingly to be running out of markets for its oil amid international embargoes as Kenya reportedly pulls the plug on a huge deal. Kenya looks to have bowed to political pressure from the UK to axe an oil purchase deal with the Middle Eastern hydrocarbons powerhouse just days after a European Union ban came into effect.
3. World powers and Iran agreed at a low-level meeting to continue their technical talks over Iran's nuclear program.