RANsquawk's  Instablog

· PBOC cuts their benchmark interest rate by 25bps to 6.31% in their first rate cut since December 2008.

· Risk assets rally strongly across the board following the PBOC rate cut, with WTI and Brent crude futures immediately breaking above session highs, in tandem with the basic materials sector in equity space as the monetary easing fuels future demand for resources and energy.

· European officials are weighing up a bailout programme for Spain that would aid its fragile domestic banking sector, according to reports, however the EU says there is currently no rescue plan for Spanish banks.

· BoE keeps their benchmark borrowing rate unchanged at 0.50%, and keeps their APF on hold at GBP 325bln, alongside expectations.

· RANsquawk European Market Re-Cap Video: http://youtu.be/V3IWNHKoh-g

Market Re-Cap

European equities were seen marginally higher in both the cash and futures markets after a morning's trade, and with the release of the PBOC rate cut, rallied strongly on both side of the pond now in convincingly positive territory ahead of the US open. For most of the morning, the focus was primarily on the European bond markets, as both Spain and France sell smoothly in their respective bond auctions. Spain sold just above the indicative range, with solid demand across all three lines, however the 10-year was auctioned with a yield higher than the psychological 6%. The French treasury also sold solidly across all four lines with particular demand towards the longer-end of the maturity range.

Peripheral bond yield spreads have been progressively tightening throughout the morning, particularly following the smooth set of auctions, as such, the Spanish yield spread against the Bund is seen around 14bps tighter, although has come off its tightest levels in recent trade. Assisting the moves were various overnight reports stating that the German powers are softening their stance towards a Spanish aid line, with Spanish press writing that the country is in line to receive EUR 80bln from the EU.

The BoE held both their benchmark borrowing rate and their Asset Purchase Facility unchanged at 0.5% and GBP 325bln respectively; however the rate decision was succinctly overshadowed by the PBOC cutting their benchmark interest rate for the first time since December 2008, with a cut of 25bps to 6.31%.

US Headlines

Fed's Yellen has laid out the case for the central bank to provide more support for the fragile US economy as the headwinds from Europe continue to mount. Yellen cited risks from ongoing housing problems, a weak jobs market and worsening financial conditions in comments that suggest the Fed may be close to easing policy again. Yellen sees the US economy growing at around 2% and said the labour market appears to have stalled. (FT-More)

Asian Headlines

China cuts benchmark interest rates by 25BPS to 6.31%

- Cuts benchmark deposit rate also by 25BPS to 3.25%

- Deposit and lending rate cuts are effective Friday 8th June

- Lowers lending rate floor to 80% of benchmark rate

- Raises upper ceiling of deposit rate to 110% of benchmark rate. (Newswires)

US and European equity futures rallied strongly following the release, with WTI and Brent crude futures moving convincingly into positive territory.

EU and UK Headlines

European officials are weighing up a bailout programme for Spain that would aid its fragile domestic banking sector while imposing only "very limited conditionality" on Madrid, a concession that could make a reluctant Spanish government more willing to accept international assistance. The proposed Spanish rescue would require few austerity measures beyond reforms already agreed with the EU, however people briefed on the discussions have said that officials have been looking at plans that are at least double the EUR 40bln mooted by Spain for banking recapitalisations. (FT-More)

The German government seems willing to accept that the EU might send financial help to the Spanish banking sector through the FROB, according to several German officials. According to the report, Germany is also willing to accept that conditions on the rescue will be softer than those set on Greece, Ireland and Portugal, and also limited to the financial sector. (El Pais) In other reports, the G-20 have invited the Spanish PM to discuss the Spanish crisis at the upcoming summit. (Nikkei)

The EU have downplayed reports concerning a Spanish bailout by commenting that there is currently no rescue plan for Spanish banks, and direct aid to the Spanish financial system is not possible from the ESM and the EFSF. The comments have done little to deter sentiment towards the periphery, with 10-yr government bond yield spreads against the German Bund tighter throughout the day in Italy and Spain. (Newswires)

Both the French and Spanish treasuries sold strongly at their respective bond auctions, with solid demand over all lines. The Spanish 10-yr sale however, yielded above the key psychological 6%, with borrowing costs for Spain increasing across all their lines. (Newswires)

EQUITIES

European equities are seen in positive territory in both the futures and cash markets. In the period leading up to midday, some European bourses were lagging; however the PBOC rate cut provided support past the release. Going into the US open, all sector are trading in the green with basic materials and financials leading the way higher, with utilities the only sector in negative territory. US equity futures indicate a positive open on Wall Street, seeing strong support after the Chinese central bank actions.

In individual equities news, FTSE-listed Johnson Matthey are seen performing particularly strongly following the release of their earnings pre-market. The company reported strong underlying profit and is confident on growth potential, recommending a final dividend of GBP 0.40 and a special dividend of GBP 1.00 per share. Johnson Matthey shares currently trade higher by 5.2%.

**Note: For US equity news in detail, refer to the RANsquawk Daily US Equity Opening News report.

FX

After a relatively quiet early session in Europe FX markets have been jolted by the surprise rate cut from the PBOC. The commodity linked currencies have unsurprisingly been well supported with AUD/USD trading within range of parity at the time of writing and strength observed in CAD across the board. It is worth noting that the AUD was already well bid in the overnight session following supportive Australian jobless data.

The other big mover has been the GBP which has found significant relief after the BoE did not pursue any further monetary easing, as some had feared. GBP/USD has firmly broken above the 1.5500 mark with attention also being paid to the break of 0.8100 in the EUR/GBP cross.

EUR/USD has been somewhat sluggish in comparison and is trading approximately flat heading into the North American session. Option expiries at 1.2550 and 1.2625 for the NY cut could come into play later, with stops touted into the 1.2600 level. The USD will be keenly watched in the North American session as Chairman Bernanke's economic testimony gets underway.

Currency	EURUSD	GBPUSD	USDJPY
Level	1.2584	1.5566	79.42
Change (pips)	0.0002	0.0069	0.2300

COMMODITIES

Heading into the North American open, WTI crude futures are seen markedly higher following a rate cut by the PBOC, stimulating future energy demand and pushing prices higher by over USD 1.00 ahead of the NYMEX pit open.

Oil & Gas News:· China may cut fuel prices by CNY 620 per ton.· China's Vice Premier has said the country is to adjust tariffs in order to boost imports and achieve more balanced international trade. The official did not say which tariffs may be targeted nor give a time frame for the adjustments.· The Canadian PM Harper has said Washington's decision to delay construction of the controversial Keystone XL oil pipeline was the wake-up call that Canada needed to reduce dependence on the US and strengthen links with Asia.· Algeria oil minister says OPEC to study what measures need to be taken to keep oil market balanced at meeting next week. He also added that the country is to increase gas exports to nearly 90BCM in 2-3 years.· Iran slips to number 5 oil supplier to India in April-May vs. 3rd a year ago, according to trade data.Geopolitical:· A group led by China and Russia have declared their opposition to military intervention in the Middle East as it could threaten global security.· China and Russia are studying detailed aspects of a potential gas sales agreement and the response from both sides has so far been positive, China's Vice Foreign Minister Cheng Guoping said Thursday.

Commodity	WTI Nymex	OTC Spot Gold
Level	86.05	1624.40
Change (USD)	1.03	5.10

**Note: For commodities news in detail, refer to the RANsquawk Daily Energy Commentary report

LOOKING AHEAD

Economic Releases

CDT	BST		DATA	EXP	PREV
0730	1330	US	Initial Jobless Claims (Jun 2) W/W	378K	383K
0730	1330	US	Continuing Claims (May 26) W/W	3245K	3242K
0900	1500	CA	Ivey Purchasing Managers Index (May) M/M	54.5	52.7
0930	1530	US	EIA Natural Gas Storage Change (Jun 1) W/W	60	71
1400	2000	US	Consumer Credit (USD) (Apr) M/M	11B	21.4B
N/A	N/A	US	ICSC Chain Store Sales (May) Y/Y		0.6%
Speakers
0900	1500	US	Fed's Bernanke testifies on economic outlook
0900	1500	EU	EU's Barnier at IIF Conference
0930	1530	SP	Spanish PM Rajoy meets with Dutch PM Rutte
1100	1700	SP	Spanish economy minister de Guindos to name Bank of Spain governor
1110	1710	US	Fed's Lockhart speaks on US economy
1215	1815	US	Fed's Kocherlakota
1430	2030	US	Fed's Fisher
1430	2030	US	Fed holds open board meeting on banking capital
N/A	N/A	EU	ECB's Draghi speaks at Bocconi University
N/A	N/A	WLD	IMF's Lagarde meets with US Vice President Biden and Finnish Premier
Auctions
1000	1600	US	3-, 10-, & 30-Year Refunding Announcement
1000	1600	US	Fed's Outright Trea. Coup. Sales Dec'13-Feb'14 (USD 8.00-8.75bln)
Earnings
UK	IAG (Traffic)
EU	N/A
SZ	N/A
US	JM Smucker

Prices taken at 1250BST

**'Market talk' - Signifies information that has not been formally tested through traditional journalistic channels and therefore is to be treated as unsubstantiated. Any interpretation of the talk is taken at the readers own risk and is a representation of the rumours within the market place and never generated by ourselves.