RANsquawk's  Instablog

1. Spanish PM Rajoy outlines new budget to save EUR 65bln over the next two-and-a-half years.

1. EU Commission states that senior bondholders and depositors would not be involved in Spanish banking haircuts.

1. Light Calendar and little newsflow keeps price action relatively muted in the European session, market focus now turns to the FOMC minutes release.

1. RANsquawk European Morning Briefing Video: http://youtu.be/E19rSDuMces

Market Re-Cap

European equities are seen firmer at the North American crossover, however, a light calendar and little newsflow has kept market price action muted.

Spanish PM Rajoy has presented new budget measures to the Spanish parliament, planning to save a total of EUR 65bln over the course of 30 months, through a series of indirect taxation adjustments and spending cuts in the public sector. The PM has further warned that Spain is not out of the woods yet, with the economic slump set to continue well into 2013.

The Bundesbank held a solid Bund auction this morning, with a higher bid/cover and, once again, a record low yield on their 10yr debt. The results show the continued preference amongst investors for the German paper, however the 10yr government bond yield spread between the periphery and the German counterpart is seen tighter on the day, with talk of domestic accounts buying Spanish and Italian paper taking pressure off yields. Elsewhere, the EU Commission have stated that senior bondholders and depositors would not be involved in the Spanish bank haircuts, further easing concerns.

UK Gilt futures have been observed outperforming with today's 41K- equivalent supply from Germany weighing on the Bund, with the effect being exacerbated by the BoE looking to purchase in the belly of the curve at today's QE operation.

Looking ahead in the session, market focus now turns to the US, where the FOMC are set to release the minutes of their June rate-setting meeting, due at 1900BST/1300CDT.

Asian Headlines

Japanese Domestic CGPI (Jun) M/M -0.6% vs. Exp. -0.4% (Prev. -0.4%, Rev. -0.5%)
Japanese Domestic CGPI (Jun) Y/Y -1.3% vs. Exp. -1.0% (Prev. -0.5%, Rev. -0.7%) (Newswires)

Chinese Premier Wen has said stabilizing growth is a top priority of the country, adding that current policies and measures include tools for boosting consumption, diversifying exports and promoting investment. (Xinhua)

S&P have said China's banking profitability will likely be hit in 2013. (Newswires) S&P highlight that China's recent interest rate cuts will not have too much of an effect on banking profits this year, but bottom lines will likely weaken in 2013. S&P estimate that the PBOC's actions will weaken the banking sector's return on assets in 2013 by 10bps.

US Headlines

Fitch affirmed the US at 'AAA'; outlook remains negative. (Newswires) Fitch noted that the US rating is underpinned by its highly productive, diversified and wealthy economy , as well as it's monetary and exchange rate flexibility. Fitch sees the US federal debt held by public reaching 79% of GDP by 2014, noting that risks to US forecasts are mostly to the downside in light of uncertainty regarding US fiscal policy and European debt crisis. Fitch doesn't see resolving US negative outlook until late 2013, absent material adverse shocks.

The City Council of San Bernardino, CA has voted to file for bankruptcy, marking the third Californian city in recent weeks to seek protection from creditors. (Newswires) The decision was made after a report compiled by city staff showed the city facing an imminent financial crisis, wherein the city's projected spending would exceed revenue by USD 45mln in the current fiscal year, with all reserves exhausted.

US MBA Mortgage Applications (Jul 6) W/W -2.1% vs. Prev. -6.7% (Newswires)

EU & UK Headlines

The Spanish government is being urged by European authorities to inflict losses running into billions of Euros on small savers by writing off preferred shares and subordinated bonds as a condition of the bailout, according to a draft memorandum. (FT-More)
The Spanish banks that will receive EU funds will have to contribute to their own restructuring process and will have to sell non-strategic, non-core assets and suppress dividend payments or any compensation on hybrid capital instruments. The Spanish government will then liquidate any entities that are seen as unviable. (El Pais)
The largest Spanish banks will be forced to undergo a series of stress tests as a condition of the aid, and should they have capital shortfalls, the banks will have to raise money on the market, or come to a burden-sharing agreement with investors before being granted access to government funds. (WSJ)

On the topic, the EU Commission have said they are working on the principle that private sector distribution of losses in Spain's banks will be necessary, but it is clear that senior bondholders and depositors would not be involved in this burden sharing. (Newswires)

The Spanish PM Rajoy has presented the country's revised budget to parliament, and sees structural cuts of 2.5% in 2013 and 1.9% in 2014. The new budget sees measures are to total EUR 65bln over the next 2-and-a-half years consisting of a VAT rise and public sector cuts. Rajoy estimates that 2013's contraction will be smaller, closer to 0%. However, Spain remains in the second deepest recession of history. (Newswires)

Germany sells EUR 4.153bln 1.75% Jul'22 Bund, bid/cover 1.50 , Prev. 1.40 (yield 1.31%, Prev. 1.520%, Retention 16.9%, Prev. 19.20%) (Newswires)

Equities

Core European bourses are seen modestly higher at the North American crossover, with the CAC-40 the only index taking losses. Outperformance is noted in the Spanish IBEX-35, as the PM presents a credible budget plan to parliament, as well as the EU Commission highlighting that senior bondholders and depositors of Spain's banks will not be involved in the proposed haircuts. The telecommunications sector is seen as the strongest performer in Europe today, closely following by utilities and financials.

European banking stocks are performing strongly today, with marked outperformance noted in the French banks. The moves were compounded with the EBA saying that European banks increased their capital reserves by EUR 94.4bln in the first half of this year by holding profits, selling shares and converting lower quality capital to common equity. As such, banks such as SocGen, Credit Agricole and BNP Paribas are seen higher by 2% apiece.

In individual equities news, after performing solidly over the past two sessions, EADS are now seen on a downward turn after having reported that their Airbus unit no longer sees their flagship A380 model reaching 30 sales this year. The reports saw an instant move lower of around 0.75% in EADS shares, which are now seen lower by over 4%.

FX

EUR/USD is seen higher at the midpoint of the European session, being assisted higher following unconfirmed market talk of Chinese names liquidating long-USD positions. The gains in the pair have been capped somewhat by semi-official sellers seen at the 1.2290 mark and a slew of option expiries between the 1.2200-1.2300 levels for the 10am (1500BST) NY cut could provide resistance in the pair as we progress through the session.

Touted sell orders in EUR/GBP have provided support in GBP/USD this morning, which is seen firmly higher by around 50pips today. Option expiries for the 10am (1500BST) NY cut seen at 1.5500 and 1.5540 may prove magnetic should the pair see any downside as the session moves forward. EUR/GBP may remain in focus as the session progresses should the cross approach 0.7884, which marks a 44-month low.

Commodities

WTI and Brent crude futures have somewhat rebounded and are seen higher ahead of the NYMEX pit open, as API inventory figures show stockpiles continuing their decline. Participants now look ahead to the weekly DOE numbers due for release at 1530BST/0930CDT.

Oil & Gas News:

1. The EIA have cut their crude oil price projection for 2012 as production has increased and slower economic growth has curbed fuel use. The EIA now expect WTI to average USD 92.83/BBL this year, a 4.1% fall in their forecast. The EIA have also cut their 2012 world oil demand growth forecast by 130,000BPD to 670,000BPD.
2. Morgan Stanley has said lost Iranian supply is unlikely to rebalance the market, as the market remains oversupplied.
3. According to sources, Saudi June oil output 10.1MBPD vs. 9.8MBPD in May
4. LNG exports from Australia are poised to triple in the next five years as demand from China and developing economies climbs, according to the Australian government. The government now expects to export 63MMT of LNG per year by 2017.
5. The US have raised their forecast for natural gas output in 2012 by 0.7% on higher shale production, and have raised their estimate for prices.
6. Oil production in North Dakota rose to a record high of just under 640,000 barrels per day in May, reinforcing the state's position as the second-largest oil producer in United States, behind Texas.
7. Credit Suisse have cut their 2012 WTI price forecast to USD 91/BBL from USD 112/BBL, and their Brent price forecast to USD 104/BBL from USD 125/BBL.

Geopolitical News:

1. China have told Japan to respect its sovereignty over the disputed chain of islands in the East China Sea. Japan has summoned China's ambassador to protest against the appearance of Chinese patrol boats near the islands. Three Chinese fishery patrol boats entered the area early on Wednesday and have since left, reports say.The Japanese and Chinese foreign ministers are due to hold talks on the sidelines of the Asian forum in Cambodia over the islands.

Last price taken at 1234BST

**Note:

Brent Crude August options expiry (1930BST/1330CDT)

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