RANsquawk's  Instablog

· OECD cuts Euro-area GDP forecast to -0.1% from 0.2%.

· Fitch downgrades Japan to 'A+' from 'AA'; outlook negative.

· Greek banks to get EUR 18bln recapitalisation down-payments Friday, according to a source.

· RANsquawk European Morning Briefing Video: www.youtube.com/watch?v=1EVQ_JIr27I

Market Re-Cap

UK CPI this morning came in weaker than expected at 3.0% Y/Y in April, weighed by a fall in air fares, alcohol, clothes and sea transport, according to the ONS. The release saw aggressive selling of GBP in the currency market and has underpinned the rise in gilt futures. Alongside the 26th month low in UK CPI the IMF also issued their latest assessment on the UK economy and said further policy easing is required and that the Bank could cut its interest rate from the current 0.5% level.

In other market moving news a Greek government source said that Greek banks are to receive a EUR 18bln recapitalisation down payment this Friday which initially saw the EUR and stock futures rally, however, the move was short lived as it became clear that the payment is scheduled as part of the bailout programme for Greece. Elsewhere, Fitch made a surprise announcement and downgraded the Japanese sovereign rating by two notches to A+, outlook negative. The move means Fitch has the lowest rating for Japan of the three main rating agencies so we remain vigilant for any comments from S&P and Moody's today.

Looking ahead the main data from the US comes in the form of existing home sales for April and Richmond Fed manufacturing, both of which are scheduled for release at 1500BST. In terms of fixed income, the US Treasury will be kick start its issuance for the week offering a 2yr note for USD 35bln at 1800BST.

Global Headlines

The OECD have released their latest forecasts for global economy:

-cuts 2012 China growth forecast to 8.2% from 8.5%

-raises 2012 US growth forecast to 2.4% from 2.0%

-sees UK GDP +0.5% on year in 2012, +1.9% in 2013

-cuts Euro-area GDP forecast to -0.1% from 0.2%. (Newswires)

Asian Headlines

Fitch have downgraded Japan to 'A+' from 'AA'; Outlook negative. The downgrades and negative outlooks reflect growing risks for Japan's sovereign credit profile as a result of high and rising public debt ratios. (Newswires)

A top Chinese think-tank has said the country should continue its tight controls over the property market, as a further correction in housing prices is necessary before the Chinese economy can return to sustainable growth. (Newswires)

China are to fast track approvals for infrastructure investment within the economy in order to combat a slowdown, according to a state-backed newspaper. (China Securities Journal)

US Headlines

The US Treasury has no immediate plans to alter the size of their 2012 debt issuance which will be close to its full-year plan, according to a senior official from the US Treasury Department. However the official did say that T-Bill issuance volume can still be altered should the economic recovery change the department's views. (Newswires)

US ICSC Chain Store Sales (May 18) W/W -1.7% vs. Prev. -0.8%

-The ICSC expects May comparable store sales to rise by about 3% (Newswires)

EU and UK Headlines

UK CPI came in below expectations at 3.0%, indicating a slowdown back towards the BoE's 2.0% mandate target. As the rate was within one percentage point of the target, the BoE's King will not be required to send a letter to the Chancellor. The downside pressures to the rate came from declines in air fares, alcohol, clothes and sea transport.

-UK CPI (Apr) Y/Y 3.0% vs Exp. 3.1% (Prev. 3.5%)

-UK CPI Core (Apr) Y/Y 2.1% vs. Exp. 2.0% (Prev. 2.5%)

-UK CPI (Apr) M/M 0.6% vs Exp. 0.6% (Prev. 0.3%) (Newswires)

Elsewhere from the UK, the government posted the largest public sector net repayment on record over April, as well as Public Sector Net Borrowing data being boosted by Royal Mail asset transfers and the BoE's special liquidity scheme.

The OECD have said the ECB has room for further monetary easing, and could move toward common Eurobonds. On bond-buying, the OECD commented that the ECB should resume purchases if volatility increases in the European market. On the ESM, the OECD have suggested the facility could be used to directly recapitalize banks. (Newswires)

On the topic of Eurobonds, a senior German official has reiterated that they are not one of the instruments that have a chance to resolve the crisis, adding that Berlin's stance on the bonds is set and will not change in the run-up to the June summit. (Newswires)

Spain is pushing for a big ECB role in the new EU strategy to boost growth and wants the ECB to support the volatile debt markets, according to a Spanish government official. (Newswires)

Taking guidelines from how badly Ireland's banks were hit in its financial crisis, economists at the IIF institute said they expect the losses to be in the range of between EUR 216bln and EUR 260bln. (Telegraph)

EQUITIES

European equities are trending higher in both the cash and the futures markets, with tighter European bond yield spreads observed against the German 10-year Bund, indicating some modest risk appetite present in participants today. In terms of sectors, Industrials are seen as the outperformer heading into the US session, closely followed by Basic Materials.

European Financials are seen in minor positive territory as the US comes to market, with some relief coming from reports that Greece are to receive EUR 18bln in recapitalization funds this Friday, according to source comments. Heading into the US session, JP Morgan may continue to garner focus as unsourced reports comment that the company's recent trading losses could rise to USD 7bln from the initial USD 2bln revealed. (Independent)

In individual stocks news, the largest cap stock on the FTSE-100, Vodafone, has reported a very modest beat in FY revenues, with the figure standing at GBP 46.4bln vs. Exp. GBP 46.3bln. However, Vodafone's CFO has commented that the company are to miss their 2013 service sales medium-term target, but have reported that their margin decline is to continue to improve. As such, Vodafone shares are currently seen higher by 3.7%.

In other news, Bankia are seen markedly lower and are one of the worst performers today following reports from the IIF that Spanish banking losses could total between EUR 216-260bln. Bankia have been seen trading lower throughout the day, and are now seen down 3.7%.

**Note: For US equity news in detail, refer to the RANsquawk Daily US Equity Opening News report.

FX

Following the Fitch downgrade of Japan, most volatility was noted in USD/JPY, which spiked higher by around 25pips. The pair did retrace the initial spike, but continues on an upward trend at the midpoint of the European session. Market talk of offers in the pair may cap further gains at the 80.00 level, however this remains unconfirmed.

Elsewhere, GBP/USD saw rapid weakness following the lower-than-expected CPI report from the UK, moving lower by 25pips in the minutes following the release. The pair saw further downside moves following IMF comments that the UK requires further monetary easing. The IMF commented that the BoE has room to conduct more QE, and could even cut the benchmark interest rate. The pair now trends at around the 1.5775 level, failing to recoup losses experienced earlier in the session.

COMMODITIES

Heading into the North American open, WTI crude futures are trading lower after OECD cut growth forecasts for Europe, while Iran reached an agreement that will allow the IAEA to investigate alleged nuclear-weapons work in the Persian Gulf nation.

Oil & Gas News:

Geopolitical News:

· The US Senate unanimously approved a package of further economic sanctions on Iran's oil sector days ahead of a meeting in Baghdad between major world powers and Tehran.

· Iranian Foreign Minister Ali Akbar Salehi in a meeting with Director-General of the IAEA Amano called on the IAEA to adopt a balanced attitude towards member states and defend their rights to access nuclear energy.

· United Nations atomic inspectors and Iran reached an agreement that will allow the IAEA to investigate alleged nuclear-weapons work in the Persian Gulf nation.

**Note: For commodities news in detail, refer to the RANsquawk Daily Energy Commentary report.

LOOKING AHEAD

Economic Releases

Prices taken at 1238BST

**'Market talk' - Signifies information that has not been formally tested through traditional journalistic channels and therefore is to be treated as unsubstantiated. Any interpretation of the talk is taken at the readers own risk and is a representation of the rumours within the market place and never generated by ourselves.

· G8 leaders backed a 'strong and cohesive' Euro-zone including Greece and committed to boosting growth and demand.

· Fed's Lockhart says QE3 cannot be taken off the table.

· German govt. spokesman says position on Eurobonds has not changed and Germany are still opposed.

· German and French finance ministers will hold a news conference at 1530BST, according to the German finance minister.

· RANsquawk European Morning Briefing Video: http://youtu.be/m6qheZqimt0

Market Re-Cap

At the beginning of the week, European equities are seen modestly higher in the major indices with underperformance noted in the peripheral markets. Markets have sought some solace in the G8 summit over the weekend, with leaders agreeing that the optimal scenario would be Greece remaining within the European Monetary Union, and have furtively agreed that further measures may be necessary to return Europe to growth. The disagreements, however, continue to rollover as leaders fail to commit to a specific growth strategy.

The tentative risk sentiment is reflected in the fixed income markets, with the German Bund remaining in negative territory for much of the session and 10yr government bond yield spread between the periphery and the German benchmark tighter on the session. Touted bids by domestic accounts helped support BTPs (Italian paper), especially in the short end of the curve, where the spread between the German equivalent is trading tighter by around 3bps.

From Tokyo, comments from Fed's Lockhart have drawn attention, who commented that with the downside risks emerging from the Eurozone, it would be unwise to take QE3 off the table.

Looking ahead in the session, there is little in the way of US data to distract participants away from the European continent, so focus will remain over the Eurozone and any developments regarding Greek membership or growth strategies for the monetary union.

Global Headlines

- G8 leaders backed a 'strong and cohesive' Euro-zone including Greece and committed to boosting growth and demand, alongside measures to fix debt-laden fiscal balance sheets, although it is reported that leaders had different ideas on strategies to fight the economic crisis. (Sources)

- French President Hollande said he will make proposals for Eurobonds at an upcoming informal EU summit on May 23rd as part of his ideas to stimulate growth and help ailing Euro-zone economies. (Telegraph)

- German Chancellor Merkel maintained her stance of fiscal austerity, stating that curbing public deficits and boosting economic growth are both needed and 'should not be played off against each other', she also added that G8 leaders did not discuss any proposed measures to boost growth in detail. (Sources)

-Another proposal could include empowering the Eurozone's EUR 500bln rescue fund directly to recapitalize faltering European banks and mutually issued Eurozone bonds. (FT-More)

Asian Headlines

Chinese Premier Wen has vowed to make growth a bigger priority after the economy showed signs of weakness, although Wen said that authorities would maintain 'proactive' fiscal policy and 'prudent' monetary policy. (Xinhua)

US Headlines

The US jobs market will strengthen significantly next year, with monthly jobs growth expected to average 200,000, according to NABE survey. The report forecasts unemployment at 7.5% by the end of 2013. (Sources)

EU and UK Headlines

- The latest Greek poll showed the Syriza party in the lead with 21.7%, the New Democracy party had 20.2% and the Pasok party had just 11.7% of support. (Metro) Syriza party leader Tsipras said the party's opposition to the terms of Greece's financial-aid program does not mean the country would have to abandon the EUR if his party forms a government after the June 17th elections. The leader added that if elected, he would seek talks with the Troika on new terms for the country to stay in the currency. (Sources)

- The EU Commission, ECB and in-house experts are working on Greek Euro exit scenarios, and assessing the impact of such an event on the Euro-zone firewall and Euro-area banks, according to a source. The source added that the firewall should be increased if Greece does exit the Euro-zone. (Sources)

- Greece's central bank denied a national newspaper report that the institution was planning to impose capital controls on withdrawals and to restrict the movement of capital abroad. (Sources)

- Spain re-stated its 2011 budget deficit, noting it was 8.9% of GDP vs. 8.5% initially stated because of a change in regional budgets, where three Spanish regions revealed deeper than expected 2011 budget deficits, according to budget plan documents. (Sources)

- LCH.Clearnet increased margins on Spanish bonds by 10%, for 1.25-30y bonds, and the changes will be reflected in the margin calls on May 25th 2012. (Sources)

-The EU will this week send inspectors to ascertain the exact figure of Spain's public deficit for 2011, according to unnamed sources. (La Vanguardia)

EQUITIES

European stock markets inched up on Monday after G8 leaders backed a 'strong and cohesive' Euro-zone including Greece and committed to boosting growth and demand. However the price action was somewhat choppy, after comments from German government spokesman, who noted that position on Eurobonds has not changed and Germany are still opposed, raised questions as to whether French President's attempt to push for Eurobonds at an upcoming informal EU summit on May 23rd will succeed.

Spanish banks underperformed its peers, with Santander (-2.2%) and BBVA (-1.9%), as market participants reacted to Friday's margin hike by the LCH Clearnet, as well as various press reports which questioned the health of the domestic banking system:

- The Bank of Spain noted that Spanish banking sector holds EUR 147.19bln of 'doubtful' loans as of the end of March 2012, 32.7% higher than a year ago. (Expansion)

- Spain is seeking an ECB liquidity injection for its banks according to a report. (Sources)

Comments by Chinese Premier Wen, who vowed to make growth a bigger priority amid signs of weakening demand supported basic materials and industrials sectors. On that note, LME Copper advanced today on the back of a weaker USD, as well as technical buying.

**Note: For US equity news in detail, refer to the RANsquawk Daily US Equity Opening News report.

FX

EUR/USD was been trading in a tight range for the majority of the European morning session and sitting around a touted option expiry seen at 1.2780 for the 1000am NY cut (1500BST). GBP/USD has also observed some range-bound trading in European morning trade, following the lack of market moving events/news flow.

COMMODITIES

Both WTI and Brent crude futures are seen higher ahead of the NYMEX pit open, with the G8 Summit over the weekend providing upbeat commentary about support to the Eurozone growth including Greece.

Oil & Gas News:

· Saudi Arabia raised crude production by 0.7% to a near 31-year high at 9.92mbpd in March to become the world's largest producer for the first time in 6-years, exports rose 3% in response to the cut in Iranian shipments according JODI.

Geopolitical News:

· The head of the UN nuclear watchdog agency made an unscheduled visit to Iran on Sunday, spurring speculation that Tehran may have finally agreed to let inspectors visit secret sites and interview top nuclear officials. At the G8 summit, however, G8 leaders vowed to maintain pressure on Iran, but they acknowledged that US sanctions and an EU embargo in the coming months risked disrupting global oil supplies further.

· Iran is dedicated to annihilating Israel, the Islamic regime's military chief of staff declared Sunday.

**Note: For commodities news in detail, refer to the RANsquawk Daily Energy Commentary report.

LOOKING AHEAD

Economic Releases

Prices taken at 1147BST

**Note:

Market Closed Canada

**'Market talk' - Signifies information that has not been formally tested through traditional journalistic channels and therefore is to be treated as unsubstantiated. Any interpretation of the talk is taken at the readers own risk and is a representation of the rumours within the market place and never generated by ourselves.

With a lack of major data from Europe and the US this week, focus will likely remain on the macroeconomic difficulties facing the Eurozone as the fringe countries of Greece, Spain and Portugal wear away any progress made in the core economies. This weekend saw the G8 leaders' summit in Camp David wherein they have reiterated the primary importance and significance of the European economy to the global marketplace.

Although opinions remain divided among leaders, one very strong consensus is that action needs to be taken by the European governments against the dwindling recovery, which is becoming increasingly expensive for both the leaders' credibility and their country's balance sheets, as peripheral bond yields remain staunchly elevated above the benchmark Bunds of Germany. Unfortunately for some, that is where the agreements end, as those at the forefront of the austerity drive, namely German Chancellor Merkel, are becoming increasingly isolated against those who favour a shift in focus from fiscal responsibility and deficit targets and onto a far more interventionist growth strategy. One such proposal for growth that has garnered attention in recent weeks is the topic of common Eurobonds, sold by the Eurozone collectively and used to fund large scale infrastructure projects across the Euroarea in a direct move to inject growth. One of the main proponents of this strategy is the new French President Hollande, who is expected to propose the plans at an informal EU summit this week; however the approach will likely face fierce opposition from German parties, who foresee the concept as adding unnecessary additional strains to government balance sheets. Other such growth strategies that are being speculated upon include a boost in capital for the European Investment Bank, but recent commentary regarding ECB action has made the central bank the focal point for many investors, as leaders including the US President and the UK Prime Minister believe the institution can do more in order to return the area to growth.

Despite the few and far between data releases this week, the UK figures may garner focus in the light of the recent publication of the Bank of England's quarterly inflation report as markets receive an update on the expected fall in inflation rates in Tuesday's CPI figures. This release is swiftly followed by the central bank's minutes on Wednesday which may come under particular focus considering the recent return of Adam Posen to his dovish roots, as he claims he may have been premature in taking further asset purchases off the table. Additionally, Thursday sees the release of the second Q1 GDP print from the UK. Commentary following the release of the flash reading has speculated that the first estimate overlooked some of the modest strength underlying the UK economy over the first three months of the year, so any upwards revisions will gain attention. From the US, data is light, but markets will receive the latest existing home sales and new home sales data on Tuesday and Wednesday respectively.

In the middle-east, time is running out for Iran, as this week sees a meeting between IAEA inspectors and Iranian diplomats who are set to battle over the country's ongoing nuclear activities. Reports over the weekend that inspectors undertook an unscheduled visit may be seen by some as a signal that the nation is softening its stance on access, a sign that the looming wall of global sanctions is changing the government's way of thinking. With recent weeks seeing multi-month lows in the energy complex, any indication that the geopolitical tensions are easing further could see an extension to the declines observed recently. This weekend's G8 Summit saw a renewed commitment to sanctions on the country, so the pressure on Tehran to give in to inspection demands continues to build. G8 leaders also discussed the tactical release of strategic oil reserves, so any commentary regarding an increase in supply will more than likely be reflected in prices. It should be noted that any moves from the global powers are unlikely in the very-short term, but speculation that a release would happen before the US Presidential elections continues to spearhead current analyst's thought.