Spanish Sentiment Declines; Markets Quiet Amid UK Banking Holiday

Includes: EWU, IEV
by: John Phillips

Things were quiet in Europe overnight as the UK was on a banking holiday, and there was little follow through from Asia as Golden Week is in full swing. In sector rotation overnight ING’s European Equity Strategy segment raised both the chemical sector and the oil and gas sector to neutral from underweight, and cut the media, telecom, healthcare, and technology sectors to neutral from overweight.

In the papers, the Financial Times wrote overnight that Lloyds [LLOY.UK] is expected to announce write-downs of between £500M and £900M. Die Welt wrote overnight that Boeing (NYSE:BA) has signaled a further 9-month delay to deliveries of the 787 Dreamliner. A Boeing spokeman refused to comment on the report, which cited a letter sent by the company explaining that orders will now be fulfilled 27 months late. According to the Wall Street Journal United Airlines is mulling a tie-up with US Airways (LCC). The article notes that a potential merger with US Airways carries large labor risks and regulatory uncertainties. According to people familiar with the matter, a decision could come in the next 10 days. The Financial Times reported overnight that Sotheby's (NYSE:BID) and Christie's plan to sell up to $1.8B of art during the New York selling season (+25% y/y) According to the Wall Street Journal American Capital Strategies (NASDAQ:ACAS) may be improperly valuing some of the loans which it holds. Specifically, the WSJ notes that American Capital Strategies has been placing full value of various loans it has made even as other investors who hold the same debt already have cut the values. The article notes that a new account rule may force the firm to lower the valuations on these assets. The Times wrote overnight that AOL (NYSE:TWX) is looking to pursue a partnership with Microsoft (NASDAQ:MSFT) The article notes that AOL has approached Microsoft about a potential tie-up after the deal between Yahoo and Microsoft collapsed.

In energy news overnight, according to wire reports overnight UK PM Brown called for international pressure on OPEC to lower prices. Saudi Aramco announced plans cut prices of June crude to the US and Europe. Aramco will cut prices for the US by $0.90-$1.20/barrel, and prices for Europe by $0.40-$1.85/barrel.

In fixed-income related news overnight, France's budget minister, in the Guardian, ruled out an increase in taxes, adding that France would meet a target to cut its budget gap to 2.5% of GDP. According to the Financial Times an attempt by various investment banks to sell about £780M of debt related to Alliance Boots collapsed due to a disagreement regarding the terms of the sale. The Wall Street Journal noted overnight that the US government has established a last resort program for US student loans .Under the plan, the Dept of Education will be ready to process emergency advances for students loans by June 1. The Times’ shadow MPC voted 5-4 to leave interest rates on hold ahead of this week’s Bank of England policy-setting meeting. Two of the Shadow MPC members argued that a 50bps rate cut is needed to head off a sharp recession. Amid the views of those that voted to keep rates on hold were the views that the £50B liquidity scheme has lessened the need for rate cuts, the bank could jeopardize its credibility by cutting rates when policy seems so ineffective, and, of course, general concern about uncomfortably high inflation. A recent survey of 60 economists showed that 5% expect a 25bps cut at this week’s meeting, while the rest expect the BOE to leave rates unchanged at 5.00%.

In central bank speak overnight the ECB’s Liikanen said that food price inflation is challenging. The Polish Central Bank Chief said overnight that Zloty appreciation has been manageable but could become a problem, adding that economic growth remains robust. Furthermore the Central Bank Chie said that a May rate hike is possible if data warrants, but noted that a key rate at 6.00% may be adequate. The People’s Bank of China’s Zhou said overnight that export growth remains strong, adding that he sees no impact from the US economic slowdown. Zhou said that it is always possible to raise interest rates, but noted that other options remain, and added that high CPI could impact economy long-term.

In currencies firmer crude prices resulting from supply concerns out of Nigeria softened USD sentiment a touch in thin European trading. The EUR/USD was retesting the former option barrier pivot point of 1.5500 during the mid-European morning. Commodity related currencies were firmer as well as USD/CAD was 15 pips lower at 1.0175 and AUD/USD was up 70 pips at 0.9414.

Data was light in Europe overnight, with only two economic releases. Spanish consumer confidence for the month of April declined to its lowest level since records began in September of 2004, while Euro-Zone sentix investor confidence declined by more than expected to 3.5.

Looking ahead, the data front is light overall, with the April ISM non-manufacturing composite the only number scheduled in the US today. In central bank speak big Ben is due to speak on mortgage foreclosures at Columbia university. On the earnings front notable CMS Energy (NYSE:CMS), Great Atlantic & Pacific (GAP), and Pilgrim’s Price (NYSE:PPC) are all scheduled to report earnings ahead of the equity open.