RANsquawk's  Instablog

1. WSJ writes that ECB's Draghi proposed imposing losses on senior Spanish savings bank bond-holders when pressed in liquidation. EU reiterates that senior bondholders will not forced to take losses.
2. Saudi Arabia and the UAE have opened two new pipelines bypassing the Strait of Hormuz in a move that will reduce Tehran's power over global oil markets.

1. Markets look ahead to Fed Chairman Bernanke's semi-annual testimony taking place tomorrow and Wednesday, as well as Spain selling 10yr debt this Thursday.

1. RANsquawk European Morning Briefing Video: http://youtu.be/Xcjh0i6F4p4

Market Re-Cap

European equities are seen in flat to minor negative territory amid thin volumes and little newsflow, as the Summer-holiday effect begins to take effect. Data releases have been few and far between, as Eurozone CPI and Trade Balance figures show no surprises, as such, markets remained unreactive.

Peripheral bond yield spreads against the German 10yr are seen marginally wider, as sentiment towards the Mediterranean economies remains sour. Participants are eyeing tomorrow's T-bill sale from Spain as the next test, but primary focus will remain on Thursday's 10yr bond auction, the first since Spanish PM Rajoy outlined EUR 65bln in budget cuts last week.

WSJ reports from over the weekend have garnered attention, as sources suggest that ECB's Draghi was in favour of imposing losses on senior Spanish banking-bondholders, should the banks be pressed into liquidation, a report on which the ECB has declined to comment. Despite European finance ministers rejecting the proposals, the suggestion that the ECB would be in favour has weighed upon sentiment towards the periphery.

EUR/USD has broken below the 1.2200 handle once again, as participants remain focused on the ratification of the ESM as the next signal of a step forward for the single currency. Weekend reports have highlighted that this process remains a tricky path, with Moody's warning that any delay in its implementation from Germany would be credit negative for all European sovereigns.

Weekend press reports from China have been catching focus, as the Chinese Premier warns that the Chinese economy is yet to pick up momentum in its recovery, weighing upon WTI crude futures and the basic materials sector at the midpoint of the European session.

Looking ahead in the session, US Advance Retail Sales data is expected at 1330BST/0730CDT, along with Empire Manufacturing, but price action looks to remain muted ahead of Bernanke's testimony set to begin tomorrow.

Asian Headlines

The Chinese State Council may hold a meeting as soon as July 18th in order to discuss the economy in H1 and fiscal and monetary policies in H2, according to unidentified analysts, after which, the analysts expect the government to launch a new round of stimulus. (China Securities Journal)

Chinese premier Wen warned that the momentum for a recovery in economic growth is not yet in place and that difficulties may persist for a while. (Xinhua) However, Wen also said that economic growth is within the targeted range and government measures to support growth are bearing fruit.

US Headlines

Fed's Lockhart said the Fed may need to 'respond more aggressively' as if the economy continues on track indicated by recent data, and policy premises underlying Fed forecasts become untenable. (Newswires) The Fed official said he is comfortable with a late 2014 rate hike, adding that a new round of easing, if it were to occur, could include MBS purchases. Lockhart also said that his support for current policy stance rests on forecast that sees a step-up in growth and employment by the year-end and into 2013, adding that he had downgraded his forecasts recently.

Fed's Lacker said expectations for what central banks can accomplish have become over inflated, reiterating he does not see the need for additional Fed stimulus, and adding that the Fed crowding out the Treasury market is not a major concern as the market can adapt. (Newswires) Lacker revised down his forecasts for growth in the US economy to 2%, and said he sees inflation trending around the Fed's target of 2% with a balanced outlook for consumer prices.

A majority of Americans say the US needs to toughen its trade policies with China and is concerned that too many jobs are being 'shipped' overseas, according to a bipartisan poll. (FT-More)

The impact of the Eurozone crisis is becoming more pronounced in the US and businesses are holding back ahead of scheduled tax hikes and domestic spending cuts, according to an NABE survey. (Newswires)

EU & UK Headlines

German chancellor Merkel is set to face a fresh revolt from the ranks of her own centre-right supporters when the German parliament is recalled for a special vote on the provision of up to EUR 100bln in aid for the Spanish banking industry. (FT-More) The Bundestag is expected to vote on Thursday in favour of the bailout with a clear majority, but the parliamentary leader of the Christian Democrat group forecast at the weekend that Ms Merkel would not gain an outright "chancellor's majority" for the deal.

Moody's have said a delay in the German court ruling on the constitutionality of participating in the ESM is credit negative for all Euroarea sovereigns. (Newswires) Elsewhere, Moody's have said the Draft MoU on financial aid for the Spanish banking sector would impose losses on subordinated debt and hybrid capital instruments of lenders that need support from government or EU authorities.

ECB's Weidmann urged Spain to take a bailout for the country and not just banks, adding that the bond markets would appreciate aid conditions going beyond the banks, according to a report. (Newswires) The German ECB representative also said Italy does not need a bailout because high borrowing costs do not justify aid, further adding that quick ESM ratification alone will not calm the markets.

On July 9th, the ECB advocated imposing losses on holders of senior bonds issued by the most damaged Spanish savings banks if pressed into liquidation, though finance ministers have now rejected the approach, according to people familiar with the discussions. (WSJ) The ECB has declined to comment on the report. Elsewhere, senior bondholders will not be forced to take losses under European plans to finance the overhaul of Spain's banking industry according to the European Commission (Newswires)

Eurozone Trade balance SA (EUR) (May) M/M 6.3bln vs. Exp. 5.0bln (Prev. 6.2bln, Rev. 4.5bln)
Eurozone Trade Balance (EUR) (May) M/M 6.9bln vs. Exp. 4.0bln (Prev. 5.2bln, Rev. 3.7bln)
Eurozone CPI (Jun) Y/Y 2.4% vs Exp. 2.4% (Prev. 2.4%)

Eurozone CPI (Jun) M/M -0.1% vs Exp. 0.0% (Prev. -0.1%) (Newswires)

Finland and Spain may conclude negotiations over collateral today to enable Finland's participation in the bank rescue, according to unsourced reports. (YLE)

EU officials said it is too early to say how Greece will meet its financing needs and discussions can only begin once the Troika are back in the country. (Newswires) These comments followed reports that the ECB could consider allowing Greece to delay a bond payment in August or the possibility of bridge financing.

The Italian economy minister said that GDP is expected to shrink "a little less" than 2% and that a balanced budget is "at hand". He also said that the planned sale of public assets could decrease public debt 20% in five years. (Corriere della Sera/Newswires)

Equities

European equities are seen in flat to minor negative territory with little in the way of data or newsflow of note taking effect on trade. Modest risk aversion is observed amongst stocks, with the defensive healthcare sector seen outperforming. The primary laggard sectors today are basic materials and oil & gas, both of which are making losses following weekend reports of Chinese Premier Wen stating that the Chinese economy is yet to pick up momentum and stage a strong recovery, weighing on future commodities demand. US stock futures are seen in negative territory, indicating a lower open on Wall Street today.

FTSE-listed IAG are seen outperforming today, as their Heathrow Airport headquarters forecast a surge in daily passenger numbers as flight paths benefit from the influx of Olympics-related fares, additionally estimating that the airport is to see all-time record numbers routinely throughout the sporting event. IAG shares trade higher by over 2% at the midpoint of the European session today.

Ever-troubled Nokia are seen underperforming today, as investors remain unconvinced by the company's latest strategy of halving the price of its flagship Lumia 900 phone in the US, despite the CEO Elop maintaining that this is normal strategy, improving the accessibility of the device. Nokia shares are seen lower by 2.25% ahead of the US open today.

FX

FX markets are reflecting the thin trade, as participants eye the risk events of the week as Bernanke's semi-annual testimony, and Spain looking to sell 10yr debt this Thursday. EUR/USD is once again seen sub-1.2200, with EUR/GBP observed at levels not seen since March 2008, printing session lows at 0.7842. The downside in the pair may be somewhat limited, with a large option expiry at the 1.2200 handle possibly proving magnetic heading into the 10am (1500BST) NY cut.

GBP/USD is seen mirroring the moves in EUR/USD, with the USD benefiting from safe haven flows. GBP/USD now trades in close proximity to a touted option expiry at the 1.5500 handle for the 10am (1500BST) NY cut.

The falter in risk appetite following warnings from the Chinese Premier have weighed upon the commodity-linked currencies in the European session. As such, NZD/USD and AUD/USD are seen lower at the midpoint of the European session, moving in line with WTI crude futures.

Commodities

WTI crude futures are seen lower ahead of the NYMEX pit open as Chinese Premier Wen issues a further warning on a delayed pick-up in momentum for the Chinese recovery, weighing on future energy demand. However, losses may have been stemmed as the downbeat commentary from Wen increases speculation of stimulus from the world's second largest economy.

Oil & Gas News:

1. Saudi Arabia and the UAE have opened two new pipelines bypassing the Strait of Hormuz in a move that will reduce Tehran's power over global oil markets. The pipeline ships from Fujairah to a refinery in Pakistan and has begun the loading of around 500,000BBLs.
2. The Presidents of Sudan and South Sudan have held their first talks since their countries came close to war in April, raising hopes for a negotiated settlement of oil and border disputes before the August 2nd UN deadline.
3. Money managers, including hedge funds and commodity trading advisers, have raised their net long position in natural gas futures, options and swaps in the week to July 10th for the third week running, according to CFTC data.
4. Concerns are growing about the reliability of oil prices, after a report for the G20 found the market is wide open to "manipulation or distortion". Traders from banks, oil companies or hedge funds have an "incentive" to distort the market and are likely to try to report false prices, it said.
5. Russia may reduce duties on most oil shipments abroad by 8.9% from August 1st after Urals prices fell, while extending tax breaks for offshore fields and highly viscous crude.
6. The French government may review its stance on shale gas as part of a planned mining code revision, according to unidentified officials. The reports say that progress on the issue is to be expected by the end of the month. The previous Sarkozy government passed a law last year banning hydraulic fracturing of shale with the exception of scientific research.
7. Goldman Sachs have said their positive view on oil prices has been reinforced amid tightening sanctions on Iran and last week's Norwegian oil strike.
8. Yemen may be able to resume oil exports as planned this week after tribesmen agreed to allow repairs to the country's main crude pipeline.
9. Commerzbank see Brent trading at USD 110/BBL by the end of the year as demand picks up.
10. UK energy regulator OFGEM have said around GBP 22bln will be needed to upgrade the aged gas and electricity networks across Britain. The National Grid have responded to the reports by saying that the proposed plans conflict with the company's business proposals in several important areas and do not appropriately incentivise the essential investments.

Geopolitical News:

1. Japan has called its ambassador to China back to Tokyo for discussions on a territorial dispute straining relations between the powers.
2. Iran could prevent even a "single drop of oil" passing through the Strait of Hormuz if its security is threatened according to a top naval chief. He added that Iran's naval presence in international waters will increase.
3. Japanese insurers are expanding their maritime coverage to allow more domestic tankers to transport Iranian crude, as Tokyo looks to keep oil flowing despite tough Western sanctions.

Last price taken at: 1237BST

**Note:
Brent Crude August futures expiry (1930BST/1330CDT)

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