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  1. If the ECB does not resume its bond-buying programme in Spain, the government would consider seeking a full sovereign bailout, according to Spanish press reports. As such, any commentary from a meeting between Spanish economy minister De Guindos and the German finance minister Schaeuble will be closely watched.


  1. Chinese HSBC Flash Manufacturing PMI (Jul) M/M 49.5 (Prev. 48.2) - Slowest pace of contraction since February.


  1. Moody's revises Germany, Netherlands and Luxembourg's outlooks to negative, all remain at Aaa.


  1. RANsquawk European Morning Briefing Video:

Market Re-Cap

The major European bourses are down as US participants come to their desks, volumes still thin but higher than yesterday's, and underperformance once again observed in the peripheries, with the IBEX down 2.5% and the FTSE MIB down 1.2%. Last night's outlook changes on German sovereign debt caused a sell-off in the bund futures, with the effect being compounded as Germany comes to market with a 30-year offering tomorrow. The rating agency moves, as well as softer Euro-zone PMIs and reports that Spain is considering requesting a full international bailout have weighed on the riskier asset classes, taking EUR/USD back below the 1.2100 level. Furthermore, with Greece and a potential Greek exit now back in the news, investor caution is rife as the Troika begin their Greek report of the troubled country today.

The Spanish and Italian 10-year yields have also responded to the Euro-woes, rising to session highs of 7.62% and 6.44% respectively; the spread over the benchmark bund also widening throughout most of the day. Spain's 3- and 6-month T-bill offering sold more than the indicative range at EUR 3.05bln, with stronger demand than but also higher yields, a similar theme to the last bill auction.

WTI crude futures rallied in the overnight trade to USD 88.97 following the highest Chinese Manufacturing PMI in 5-months, pared these gains, now trading flat on the session.

Looking ahead to the rest of the session, investors look forward to the July preliminary US Manufacturing PMI, as well as July's Richmond Fed Manufacturing Index and May's House Price Index, as well as corporate earnings from Apple after-market among others.

Asian Headlines

Chinese HSBC Flash Manufacturing PMI (Jul) M/M 49.5 (Prev. 48.2) (Newswires) The data shows the ninth straight month of contraction, however the pace of contraction may have been the slowest since February, according to HSBC.

Japanese PM Noda held a rare meeting with Bank of Japan governor Shirakawa, leading to speculation that the two may have discussed ways to overcome Japanese deflation and the strong JPY. (Newswires) Shirakawa has reiterated that the Japanese economy is on a gradual recovery path, with the Eurozone debt crisis posing the greatest threat in the form of effects on Japanese business confidence and FX moves.

US Headlines

Fed's Raskin has said she expects to discuss the possibility of QE3 in relation to the Fed's dual mandate at the FOMC meeting scheduled for 31st July - 1st August. (Newswires)

BarCap month end extensions Treasury: +0.02y

EU & UK Headlines

Moody's have lowered the outlook on Germany, Netherlands and Luxembourg's Aaa rating to negative from stable, and have affirmed Finland's Aaa rating; Outlook stable due to their unique credit profile. (FT-More) Moody's have said the change is due to the increased likelihood of a Greek Euro exit and the need for greater financial support for struggling Eurozone countries from the strongest members of the bloc. The moves from Moody's rating agency bring their ratings in line with S&P's on Netherlands and Luxembourg. Germany is currently rated AAA; Outlook stable at both S&P and Fitch. In response to Moody's action, the German finance ministry has said Germany is the Eurozone's anchor of stability, a role that it will continue to play. (Newswires)

According to sources close to the Spanish government, if the ECB does not resume its bond buying programme on Spanish bonds, the government is considering asking for a full bailout that would allow it to meet its debt obligations for the rest of the year and avoid imminent financial collapse. (El Economista) Yesterday, the Spanish economy minister De Guindos ruled out the government requesting a full bailout.

Elsewhere, The Spanish region of Andalusia is seeking an EUR 800mln loan from banks to avoid a central government rescue according to reports. (El Economista)

French Manufacturing PMI (Jul P) M/M 43.6 vs. Exp. 45.5 (Prev. 45.2), lowest since May 2009

French Services PMI (Jul P) M/M 50.2 vs. Exp. 47.5 (Prev. 47.9), highest in 6 months
French Composite PMI (Jul P) 48.0 vs. Prev. 47.3

German Manufacturing PMI (Jul A) M/M 43.3 vs. Exp. 45.3 (Prev. 45.0)

German Services PMI (Jul A) M/M 49.7 vs. Exp. 50.0 (Prev. 49.9)
German Composite PMI (Jul A) M/M 47.3 (Prev. 48.5)

EUR/USD dropped 16 pips immediately following the release of the softer German data.

DAX futures dropped 9 ticks.

Spanish T-Bill Auction Results
-Spain sells EUR 1.63bln 3-month T-bills, bid/cover 2.90, prev. 2.60 (yield 2.434%, prev. 2.362%)
-Spain sells EUR 1.42bln 6-month T-bills, bid/cover 3.00, prev. 2.80 (yield 3.691%, prev. 3.237%)
-Spain sells a total of EUR 3.05bln, which is above the top end of the indicative range.

BarCap month end extensions Pan Euro Agg: +0.09y


Core European bourses are seen in flat to negative territory at the North American crossover, with the peripheral indices seen firmly lower, as the market seems to be correcting itself in Italian and Spanish stocks after overbuying yesterday. Utilities are leading the way lower, closely followed by financials, however the technology sector is seen in the green after software-maker SAP report a strong set of earnings premarket today. US stock futures currently indicate a flat-to-lower open on Wall Street today.

In individual stock stories German-listed software company SAP are making strong gains at the midpoint of the European session. SAP reported their Q2 net income beating expectations of EUR 661mln, with revenues up 18% at EUR 3.89bln. SAP report that they are on track to deliver their targets for the full year, seeing 2012 non-IFRS operating profits of EUR 5.05-5.25bln. SAP shares are last seen higher by 2.3%.

To the downside, Spanish oil firm Repsol are taking heavy losses after the Venezuelan President Chavez warned that the company would face ramifications if it proceeded with its action against Argentina over their recent dispute concerning YPF. Chavez warned that the company's significant investments in his country would come under threat after a meeting with the Argentine planning minister. Repsol shares are also seen lower moving in line with the underperforming IBEX today, their shares are last seen lower by around 4%.


EUR/USD is seen trading just above session lows printed at 1.2084 at the North American crossover. The pair has been trending lower throughout the European morning, weighed upon by the swell of bad news from Europe. The pair took a further leg lower with the disappointing PMI figures from Germany, and failed to see any significant upside from relatively stronger French Services PMI. A spell of stops below the 1.2100 level could limit downside in the pair, however any progressions or commentary regarding the Spanish issues could push through those levels.

Market talk of a European name selling in GBP/USD has weighed upon the pair this morning, however the loss have been somewhat recouped, trading in modest positive territory as the US comes to market. Any downside in the pair could be limited as dealers note bids at 1.5500 as well as 1.5485, possibly ranging trade as the session progresses. The pair now trades in close proximity to a touted option expiry at the 1.5525 option expiry for today's 10am (1500BST) NY cut.


WTI and Brent crude futures are seen making gains from yesterday's close, the lowest in a week, as China's HSBC Manufacturing PMI data makes a modest improvement, however still indicates contraction. Participants now look head to the weekly API inventory numbers due after the NYMEX pit close.

Oil & Gas News:


  1. Morgan Stanley have increased their average price forecast for US natural gas this year by 14% to USD 2.74 MMBTU.

Geopolitical News:


  1. The Syrian government is still in full control of chemical weapons stockpiles according to a senior Israeli defense official.
  2. North Korea have moved fighter jets closer to the border with South Korea since May, according to South Korean officials.

Last price taken at: 1235BST

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