European

European Equities Post Biggest Gain in Six Weeks

Europe Session Key Developments

•    Greek Bond Yields Dip Slightly After Greek Official Says Bailout Unnecessary
•    Crude Oil Posts Sixth Gain in Seven Days, Precious Metals Decline
•    Euro Resumes Bearish Trend Versus Greenback

Stocks in Europe posted their biggest gain in six weeks on renewed optimism over the Greece debt situation and better-than-expected economic data out of the U.S.  The DJ Stoxx 600 Index, a broad measure of European equities, posted its seventh gain in the past eight days.  Investors seemed cautiously optimistic that the debt problems in Greece would not threaten euro area stability after Greek Finance Minister George Papaconstantinou said yesterday that his country had “no actual need for” a bailout and was ahead of its deficit-reduction targets.  The 10-year yield on Greek bonds fell 2 basis points to 6.37 percent, reducing the excess risk premium required over equivalent German bonds by 1 basis point.  Overall, the yield on Greek bonds has increased 184 basis points this year on concern that the country would struggle to reduce the largest fiscal deficit in the euro zone.  As for the economic docket, the only major event out of Europe was U.K. unemployment, which investors managed to shrug off.  Instead, markets keyed on positive economic releases from the U.S. which showed that industrial production rose 09 percent in January and building permits beat expectations during the month.  Overall, European stocks remain 4.8 percent below this year’s high on January 19, but sentiment has clearly improved over the last week.

FTSE 100                         5276.64                     +32.58                     +0.62%
British stocks posted the smallest gain among major European indices after U.K. unemployment claims unexpectedly rose in December to the highest level since 1997.  The ILO unemployment rate for the last three months of 2009 held at 7.8 percent, as expected.  Despite the disappointing news, shares on the FTSE rallied for a third consecutive day and nine stocks gained for each that fell on the index.  Barclays gained 2.9 percent to lead banking shares higher, a day after announcing earnings that soundly beat analyst expectations.  RBS raised its recommendation on the company’s shares from “hold” to “buy” and Bank of America Merrill Lynch raised its price target.  RBS and Lloyds Banking Group gained 3.2 percent and 1.9 percent respectively, on anticipation of their earnings reports due out next week.  Further driving the FTSE today was Man Group, the largest publicly traded hedge fund, which added 5 percent on the day.  Some investors have speculated that the firm may receive a takeover bid from asset manager BlackRock.

CAC 40                             3725.21                     +56.17                     +1.53%
The French index added at least 50 points for a second consecutive session today, led by strength in financials, industrials, and technology shares.  Aerospace and defense leaders EADS was the biggest individual gainer on the index, adding 4.9 percent on news that the company’s seven government clients will pay additional costs for the A400M military plane.  Accor posted the second-largest gain, adding 4.2 percent on news that the hotel operator would increase its operable capacity by over 45 percent.  BNP Paribas, France’s largest bank, led financial shares higher after recording its fourth consecutive quarterly profit.  The bank’s shares rallied 3.9 percent after the company reported 1.37 billion euros of fourth quarter net income, above the 1.06 billion estimate of bank analysts.

DAX                                   5648.34                        +56.22                     +1.01%
The German index rallied for a third consecutive session as financials and industrials gained at least 1.4 percent each.  Deutsche Boerse, Europe’s largest exchange by market value, gained 3.7 percent to lead financials higher after the company announced a significantly smaller fourth quarter loss than analysts expected.  Deutsche Bank followed suit, adding 2.1 percent to its highest close in two weeks, after the German bank announced a sale of wealth manager BHF-Bank.  Industrial shares were led higher by mailing company Deutsche Post, which gained 2.3 percent, and Siemens, which rose 1.6 percent.  Siemens, a leader in electronics and electrical engineering, rallied on speculation that the company may acquire some components suppliers this year.

IBEX 35                          10498.60                     +104.70                 +1.01%
Shares in Spain added a full percent today, led by a 6 percent gain for Obrascon Huarte and a 4 percent increase in Grifols.  Shares of Obrascon Huarte, the Spanish building and infrastructure firm, had dropped in the four prior sesssions on weakness in the construction sector.  Grifols, a plasma firm, gained after its Australian peer CSL confirmed its full-year profit forecast.  Financial shares in Spain followed their global counterparts higher today, led by a 2.8 percent gain in Mapfre, and a 1.4 percent gain for Banco Santander.

FTSE MIB                     21650.81                     +361.61                   +1.70%
Italy’s FTSE MIB posted the biggest gain among major European indicies, rising nearly 2 percent on the day.  Trading in Milan led to a 4.6 percent gain for Fiat, after Italian Industry Minister Caludio Scajola said there are 14 offers for a company plant in Italy.  Intesa Sanpaolo gained over 4 percent on a potential unwinding of an investor agreement between Generali and Credit Agricole.  Fondiaria-Sai fell for a second straight day, dropping nearly 1 percent, after Banca Akros downgraded the insurance firm.

Written by James Russell, CFDTrading Research
Please send any comments about this report to JRussell@fxcm.com

European

European Equities Mixed Today as Plans For Greece Bailout Remain Unclear

Europe Session Key Developments

•    European Union Officials Discuss Budget Concerns in Brussels Today
•    Switzerland Consumer Prices Rise More Than Expected in January
•    Euro Resumes Decline Against Dollar as Greece Plans Remain Unclear

European stocks were mixed today as rhetoric from the European Union meeting in Brussels was unclear regarding its agreement to solve the Greek debt situation.  EU leaders have asked for a descriptive plan from Greece on how the country intends to reduce its debt-to-GDP ratio, but no concrete bailout plan has been announced.  The general consensus from analysts is that a bailout will happen in the near-future, to protect the Euro region and maintain the stability of its currency.  ECB President Jean-Claude Trichet said today that he welcomes the commitment of EU leaders to take the necessary actions to protect financial stability in the region.  President Trichet, along with German Chancellor Angela Merkel and Greek Prime Minister George Papandreou, has called for a close watch of the Greek economy and promised “determined” action to heed off the worst crisis for the euro currency in its eleven-year history.  Despite the commentary, investors showed a great deal of skepticism over today’s Greece agreement, sending four of the five major European equity indices lower on the trading day.  In addition, the euro currency continued its decline against the U.S. dollar, falling against the greenback for a sixth time in the last seven trading days.  The sixteen-nation common currency has dropped over 5 percent against the Dollar this year.  As for the economic docket, German wholesale prices rose 1.3 percent in January and Swiss CPI was slightly higher for the month, but neither had much impact on equities.  Looking ahead to tomorrow, however, economic data should have a major impact on market sentiment as fourth quarter GDP data is released for Germany, France, Italy, and the general Euro-Zone.

FTSE 100                        5161.48                     +29.49                     +0.57%
The FTSE 100 posted the only gain among the major European indices, led by gains in commodities and industrials.  Commodity producers gained on rising energy costs, as crude oil has increased to $75 a barrel this week.  Rio Tinto, one of the world’s largest mining companies, gained 2 percent on rising oil prices and a reinstatement of the firm’s dividend.  Rolls-Royce led industrials higher, gaining over 6 percent after reporting annual profit that beat analyst estimates and an announced payout to investors after winning more defense contracts.  Also pushing the index higher was Sports Direct International, the largest U.K. sporting-goods retailer, which gained nearly 8 percent on positive sales reports.

CAC 40                            3616.75                     -18.86                     -0.52%
Trading in Paris led to a slight decline on the trading day as technology stocks fell over 4.2 percent.  Overall, over two stocks fell for each that gained on the CAC.  Alcatel-Lucent was the worst performing stock on the index, falling 11 percent after posting its third successive full-year loss.  The global telecommunications company also cut its profit-margin target for 2010.  Renault posted the second-biggest decline on the index, dropping over 5 percent, after the French car maker announced that it posted a net loss of $4.2 billion in 2009.

DAX                                 5503.93                     -32.44                     -0.59%
The German index posted its first decline this week as eight of the ten DAX sectors closed lower on the day.  Financial shares posted a 1 percent decline on the day as the country’s largest bank, Deutsche Bank, dropped over 2 percent and Deutsche Postbank fell over 1 percent.  German banks have significant exposure to Greece, Spain, and Portugal, and investors remain skeptical that the regional debt problems have a viable solution.  Furthering the decline in German stocks was the automobiles sector, led by a 2 percent decline for Daimler and Volkswagen.

IBEX 35                          10281.70                    -173.30                   -1.66%
Trading in Spain led to the largest decline among the major European indices, as financials plunged over 2.2 percent on concerns over the country’s debt problems and lacking economic recovery.  The National Institute of Statistics announced today that the country’s GDP fell 3.1 percent in the fourth quarter on an annual basis and slowed 0.1 percent on a quarterly basis.  Construction firms were hit especially hard today on spending concerns, as FCC and Ferrovial each fell over 2 percent.

FTSE MIB                       21076.45                   -165.18                   -0.78%
Italy’s FTSE MIB posted the second-largest decline among major European indices, declining nearly a full percent on the day.  The most actively traded stocks to the upside included the country’s largest oil company, Eni, which added nearly 1 percent on rising oil prices, and Saipem, which gained 3 percent after analysts upgraded their recommendations on the stock.  On the losing end of trading today was Parmalat, as the dairy company fell over 2 percent after being cut at BNP Paribas from “neutral” to “underperform.”  Analysts at the bank said to avoid the stock before its February 25^th earnings release.  Also declining today was Intesa Sanpaolo, falling 3 percent after announcing plans to shut down its investment-banking unit in Athens.

Written by James Russell, CFDTrading Research
Please send any comments about this report to JRussell@fxcm.com

European

European Stocks Carving Out Major Tops, Position for Losses

Weekly Strategy

FTSE 100

Long-Term Technical Outlook

There are 2 levels that most likely produce a top.  The first level, 4751, has been reached and is where the rally from 4096 is equal to 61.8% of the 3461-4521 rally.  The next level is 5156, which is where the 2 bull legs would be equal.

Short-Term Technical Outlook

The FTSE is forming a bearish rising wedge reversal pattern. A bearish engulfing candlestick pattern has been put in place at resistance, with additional confirmation seen in negative divergence on the RSI oscillator. Initial support lines up at 4476.27, the 23.6% Fibonacci retracement level.

DAX

Long-Term Technical Outlook

There are 2 levels that most likely produce a top.  The first level, 5506, has nearly been reached and is where the rally from 4524 is equal to 61.8% of the 3589-5176 rally.  The next level is 6113, which is where the 2 bull legs would be equal.

Short-Term Technical Outlook

The DAX 30 has turned lower ahead of the 5500 level, with initial support found at the 14.6% Fibonacci retracement level (5195.96). A break lower will target the 23.6% Fib at 5029.19.

CAC 40

Long-Term Technical Outlook

There are 2 levels that most likely produce a top.  The first level, 3535, has been reached and is where the rally from 2958 is equal to 61.8% of the 2466-3400 rally.  The next level is 3892, which is where the 2 bull legs would be equal.

Short-Term Technical Outlook

Positioning for the French benchmark index looks very similar to that of the FTSE: a rising wedge bearish reversal chart formation is being confirmed by negative divergence on the RSI oscillator. Initial support has been marked at 3402.08, the 23.6% Fibonacci retracement, with a break lower targeting the 38.4% level at 3317.18.

IBEX 35

Long-Term Technical Outlook

There are 2 levels that most likely produce a top.  The first level, 1124, has nearly been reached and is where the rally from 925 is equal to 61.8% of the 670-993 rally.  The next level is 1247, which is where the 2 bull legs would be equal.

Short-Term Technical Outlook

Spanish shares have slipped below support at the 23.6% Fibonacci retracement level (1069.63) and now aim to challenge the 38.2% level at 1041.93. Beyond that, the bears will face a formidable hurdle at the intersection of the 50% Fib and a rising trend line established from the swing lows in March.

FTSE MIB

Long-Term Technical Outlook

There are 2 levels that most likely produce a top and neither has been reached.  The first level, 22798, is where the rally from 17626 is equal to 61.8% of the 12332-20702 rally.  The next level is 25996, which is where the 2 bull legs would be equal.

Short-Term Technical Outlook

The MIB index has shown a bearish engulfing candlestick setup ahead of the 22000 level and turned downward, with prices now targeting support at the 14.6% Fibonacci retracement level (20570.41). A break below that aims at the meeting place of the 23.6% mark and a rising trend line from the March swing low.

European

Treasury Yields Surge as Forecasts of a 2009 Rate Hike Balloon – Is This Realistic?

US Treasuries

•    Fed Approves 10 Banks to Repay TARP
•    International Calls to Abandon the Dollar and Treasuries Growing

Treasury Yields Surge as Forecasts of a 2009 Rate Hike Balloon – Is This Realistic?

US 10-Year Treasury Note      3.226          -8bps
Treasuries may have throttled back on momentum at the start of this week; but the deeply entrenched bearish trend is still in place. Over the past few weeks, the gradual and passive decline in treasury instruments (a rise in yields) has been leveraged by the same shift in risk appetite that has swept over the more speculative asset classes the past three months. The accelerated shift away from risk-free assets back into the open seas of the market reflects the general belief that financial conditions are stabilizing, the pace of recession is ebbing and the Fed is contemplating rate hikes in the near future. This is a volatile mix to support the sharpest drop in the benchmark 10-year T-note since April of 2004; but will the fundamentals pan out to support this reversal in the market’s fortunes?

The most tenuous support for a rebound in risk appetite is what market commentators call ‘green shoots.’ A letup in the pace of pessimism, the contraction in consumer spending, drop in investment spending and so many other critical factors has clearly developed; but an improvement in the pace of recession is not a guarantee of positive growth. An objective review of the data that has come out these past weeks supports the need for caution when making investment decisions. The symbolic thermometer for economic health, the non-farm payrolls release this past Friday marked a far-smaller than expected 345,000 net loss. Nonetheless, this was still a significant loss which finally pushed the total number of jobs losses since the beginning 2008 above the 6 million mark and inflated the jobless rate to its highest level since August of 1983. It follows that consumer confidence is still underwater and all progress made in sentiment is based in forecasts that are perhaps too optimistic with the government’s ability to recharge growth. In the meantime, consumer spending has fallen 10 times over the past 12 months and businesses are still reducing spending and trimming payrolls.

Growth may be the more publicized fundamental driver for risk appetite and the Treasury market; but the stability of the financial markets holds the greater potential for cutting the rally in yields short. With a focus on the eventual recovery in growth, it seems a foregone conclusion that the calm seas since the peak of the crisis back in September/October have ensured risk is no longer a concern. However, even Fed Chairman Ben Bernanke – who is supposed to be a cautious cheerleader for the economy – has warned about the fragile nature of the financial recovery to this point. Record low rates in short-term market and government debt is more a reflection of the artificial liquidity provided by the government than natural supply and demand. In the weeks ahead, the market’s susceptibility to falling back into a fear-fueled diversification into safe-haven assets will rest on the progress of TARP repayments, efforts to improve the public-private investment plan and ill-conceived speculation of a Fed rate hike in the near future. This morning the Treasury approved 10 banks’ plans to raise capital to satisfy a requirement to repay their TARP loans. With much of the capital coming in through the recent rise in risk appetite; there is too much dependency on fickle market sentiment to support a true recovery in the vital financial sector. What’s more, there were notable exceptions from the list of those that were approved, including Bank of America, Citi and Wells Fargo. A far greater concern than unwinding the liquidity offered to banks, is the glut of toxic debt still in the market. Treasury Secretary Geithner’s ambitious public/private plan has garnered interest from well-financed speculators; but the drop in yield has dried the well of acceptable investors. The solution of opening the market doors to other large pools of capital (like insurers and pension funds) merely cycles these toxic derivatives back into the market and raises the potential of another crisis. With these lingering threats and Fed officials weary of the risks, the priced in expectations for a rate hike before the year’s end is premium that will almost certainly be deflated.

European Government Bonds

•    Gilts Reflect Volatility as Political Unrest Interferes With Crisis Management
•    Bund Traders Must Weigh Policy Officials’ Forecasts Against Deteriorating Sovereign Debt Ratings

European Government Bond Yields Rising as Forecasts for Growth Improve, Policy Makers Take Conservative Approach

UK 10-Year Government Bond (Gilt)          3.285         -23bps
While yields on US government paper have surged over the past few weeks; the equivalent Gilts have held relatively stable as the government struggles to put the economy on stable ground. As risk appetite has inflated since the April turn, there has been a controlled diversification away from the UK risk-free paper. From the economic front, there are the same, tentative signs of an economic recovery that have been noted in the US, Euro Zone, China, and even Japan; but the conviction in this catalyzing a true turnaround is lacking. In the past few weeks, data has shown tentative improvements in key sectors. The housing sector has reported a slower pace of contraction in housing prices and the highest level of mortgage approvals in a year. Business activity has similarly improved with the smallest contraction in manufacturing in a year and the first expansion in the service sector in the same amount of time. Even consumer confidence has edge back into positive territory. However, the outlook for growth is still bleak. The IMF pegged the UK economy to the worst recession this year among the industrial nations; and that forecast is not likely to chance with the turn in sentiment measured in the markets recently. This is particularly true should political turmoil heat up. Calls for PM Gordon Brown’s resignation last week forced the administration to reshuffle it ranges. Should Brown or Chancellor of the Exchequer Alistair Darling be eventually ousted, the efforts towards a recovery could be permanently shelved.

German 10-Year Government Bond (Bund)    3.340          -1bps
Like most other government, fixed-income traders the world over, those in the Bund market have followed the unhealthy pace of growth in the asset’s underlying country. However, speculating when the economy will finally turn to positive growth took a back seat to more pressing matters. This past week, the ECB rate decision stirred up interest in yields as market participants were eagerly awaiting confirmation on the central bank’s official stance on monetary policy. In the weeks leading up to the gathering, a divergence in approach was once again developing. The central bank voted to hold rates and keep its covered bond purchasing program at 60 billion euros as expected; but from the rhetoric of the statement and comments of President Jean Claude Trichet, it was clear that the option for easing policy further down the line was still there. Balancing the future of rates as a source of return and a stymie to growth will be a critical fundamental driver in the weeks ahead (especially when policy members decide to air their opinions on what should be done through public forums). However, the health of economic growth and financial markets may have a more pressing influence than speculating on the monthly rate decisions. Despite tentative signs of improved growth, the region is still struggling. This past week, the S&P downgraded Ireland’s debt rating from AA+ to AA and set a negative outlook. Elsewhere, Latvia has been pushed to the brink of crisis and is now working on securing an IMF loan to prevent a bank default that could send waves throughout Europe. This leaves us to wonder: are policy officials forfeiting the advantage of getting ahead of the recession by being so frugal?

Asian Government Bonds

•    Consumers Won’t Be The Catalyst for an Economic Recovery with the Worst String of Earnings Losses Since 2003
•    Business Cut Back on Spending at the Fastest Pace on Records Going Back Over Half a Century

Japanese Officials are Confident The Worst Is Past, But How Long Will the Recession Last

Japanese 10-Year Government Bond (JGB)    1.716           3bps
There is an international effort to benchmark the pace of recovery and recession that each economy is experiencing relative to their major counterparts. Though, regardless of the general improvement in risk appetite and tempered pace of the global recession; the Japanese economy will lag the Western economies. Over the past few weeks, the Cabinet Office and Bank of Japan have joined the crowd by announcing the worst of the recession has passed. This is perhaps an overly optimistic forecast for an economy that just recently printed its worst pace of contraction on record. As we go forward, the health of key sectors will factor in towards establishing the probability of a recovery anytime soon. Recently, capital spending figures for the first quarter plunged the most on records going back over half a century and the output gap (the difference between supply and demand) similarly ballooned to a record. These two issues call to attention the long-term troubles even after headline growth returns. Investment and deflation could weigh on the Japanese markets for another decade as exports and domestic consumption struggle to keep the world’s second largest economy afloat.

European

European Stocks All Lower for the First Time in a Week

Europe Session Key Developments

•    Commodities Continue to Climb Higher
•    Indicator Releases Show  Signs of Improvement

European markets closed lower across the board for the first time this week as markets appear to be forming a top following a sharp rally that has been in effect since early March. Financials gave back some of the gains today along with most sectors except those involved in Health Care and commodities. Indicator releases today were mixed as Italian business confidence rose to the highest in six months while German unemployment raised optimism with barely any change from the previous month compared to expectations for 64,000 jobs lost. Other releases however were more negative as Euro-Zone business climate weakened along with industrial confidence. Retail PMI data also pulled back slightly as contraction continues. Data from the British CBI showed retail sales in the UK may have dropped. Commodities managed to keep losses on indices at a minimum as oil and metals continued to climb higher. While optimism on the future remains relatively high, investors are beginning to wake up the realization that market valuations may be too high compared to earnings for the current year.

FTSE 100                      4,387.54                   -28.69               -1.06%
The UK index closed lower for the first time since last Thursday as seven of the ten sectors finally succumbed to selling pressure. Gains were once again minimal with no sector rising more than one percent while losses in five sectors came in between one and two percent. Consumer Services and Financials led declines with losses of 1.66% and 1.60%, respectively. Hedge fund manager Man group dropped the most with a 6.90% move as a statement by the firm revealed assets under management fell 7.8% in the period from March to May 26. Profit at the fund also fell to $1.24 billion from $2.08 in the prior year. On the upside were firms correlating to commodities which rose today. Leading was Cairn energy with a 3.5% move higher following by a gain of 3.39% in shares of miner Fresnillo. Today’s data included the CBI’s retail sales survey which showed 17% of retailers reporting a drop in sales compared to net 3% citing an increase in the previous month.

CAC 40                     3,263.70                   -31.16                 -0.65%
Trading in the French market led to the smallest decline of the five majors as a rise of more than one percent in Basic Materials and Health Care partially offset losses in seven of the ten sectors. Leading the gains was steelmaker ArcelorMittal with a 3.5% gain on news that the firm will shut additional units to cut operating expenses in the face of lower capacity utilization. Also seeing considerable upside were shares of Air France, up 2.43%, and drug maker Sanofi-Aventis, up 1.40%. Leading decliners was building materials supplier Saint Gobain, which fell 6.56% on a cut to “hold” at Kepler and concerns of a prolonged recession. Data in France today showed housing permits fell significantly at 22.6% in April for the three month period while retail PMI showed a narrower contraction in May.

DAX                         4,932.88                    -67.89             -1.36%
The German Index fell back under 5,000 with the largest decline of the five majors as eight of the nine sectors fell. Consumer Goods and Industrials led the weakness with downside of 2.31% each trailed by a 1.81% fall in financials. Health Care proved resilient to the selling pressure with Merck rising 1.47%, the most on the session, followed by fertilizer maker K & S which moved up 1.07%. Four stocks closed higher. The large move in German equities comes in sharp divergence to indicator releases today, the biggest of which was a surprisingly low unemployment change from the previous month. The figure came in at 1K compared to expectations for 64,000 jobs lost. The sharpest decline on the day was seen in Deutschebank, which fell 3.73%.

IBEX 35                     9435.50                   -75.30                 -0.79%
Trading in Spain led to a small move lower for the IBEX as seven of the nine sectors fell while Basic Materials gained 2.34% on a rise in commodities. Spanish trading of steelmaker ArcelorMittal led for a second day with a rise of 3.55% followed by lender Bankiter’s 1.77% move. Lagging moves proved more volatile with builder Acciona falling 4.95% on a downgrade to “underperform” at Bank of America.

S&P/MIB                        20,150.00                    -162.00                  -0.80%
Italy’s main index closed lower by nearly one percent as losses were seen in six of the nine sectors and the ratio of losers to winners was almost 3:1. Basic Materials and Oil & Gas rose on the session as commodities climbed higher while Financials fell the most at 1.62%. Building materials firm Buzzi Unicem fell the most with a 3.17% move as firms in the industry across Europe suffered on downgrades. On the upside was utility firm A2A, which rose 2.30%.

-Written by Roman Kadinsky, CFDTrading Research
Please send any comments about this report to Rkadinsky@fxcm.com