July 3 Newsletter

3 July 2010 - Global Markets Review

Good Morning Ladies & Gentlemen,

I have been asked this week on a number of occasions what I thought of the German employment situation and whether I thought it would improve anytime soon.

So rather than extol the inadequacies of the US economic situation, I thought that this week I would offer my insight into the German Labour market.

Germany has penned a success story with its human capital amid the recent recession defying forecasts for an unemployment surge and setting an example for other developed economies.

The labour market of the biggest Eurozone economy has been surprisingly resilient in its most severe recession since the Second World War. One of the main reasons cited for the strong performance of the labour market apart from its improved flexibility is the government's short-time work scheme that saved several skilled jobs that would be needed later on when the economy rebounds.

It is better to have something than nothing at all. Validating this view, Germany's short-term working allowance scheme called Kurzarbeit successfully supported the labour market during tough times. Work sharing schemes exist in several economies, but the German one has been touted the most successful.

Under Kurzarbeit, the German government compensates as much as 67% of the foregone net wages of an employee, if the employer needs to cut wage cost and working times amid economic slowdown. When an employee is covered under this scheme, his/her social contributions such as pensions, health care, longtime care, jobless benefits are fully met by the Federal Employment Agency.

Further, if there is no work for an employee, he/she has to undergo training and skill development, costs of which are borne by the agency. Such training and development could come in handy at times of booming business. Temporary workers are also eligible for the scheme.

This sort of employment policy serves as an alternative to cutting jobs. The advantage to employers is that they can retain their trained staff during periods of economic slowdown as the government meets the salary cost. Employers can also avoid the cost of rehiring once the economic situation improves.

Kurzarbeit, though successful, is not immune to criticism. The Institute for Employment Research (IAB), a German government think tank, lists large dead-weight and displacement effects as the negative impacts of the short-time working scheme. Such schemes often retain wasteful jobs alive and slows down job reallocation remarkably when supporting jobs in sectors that are in structural decline, the group argues.

The institute also suggests a solution to limit displacement effects - which is to ensure that the duration of short-time working subsidies is limited. Further, the subsidies must be aimed at firms for whom the demand is only temporarily depressed and to workers who may find it particularly difficult to regain employment if made redundant.

The success of the Kurzarbeit partly lies in the nature of the global economic crisis, Deutsche Bank Research said in a note last month. With global trade being the transmission medium for the recent crisis, the economists noted that it was easier for short-time work to cushion the impact in terms of intensity and duration. Also, the cyclical pattern of the crisis, deflates the argument - at least partially - that short-time work acts to preserve existing structures and thus reducing the structural flexibility of the economy.

Short-time work is effective in addressing a temporary drop in demand triggered mainly by external effects, Deutsche Bank Research economists said. However, this labour policy measure is not a suitable instrument for addressing the long-term structural employment adjustments, they stated, citing the example of Spain, where the unemployment rate jumped to over 19% when the house price bubble burst.

According to official estimates, the German government paid out an estimated $16 billion in 2009 for the Kurzarbeit scheme as part of its economic stimulus package. This is a small amount when compared to the cost of supporting the unemployed. Nearly 1.5 million people were employed under the scheme while around 400,000 jobs were saved, which equals more than 1% unemployment.

Without working time flexibility measures taken over the last 10 to 15 years, Germany may have lost an additional 1.5 million jobs last year, pushing up the unemployment level above 5 million, Commerzbank reckoned in a recent note. An optimistic Commerzbank does not see any further rise in unemployment by year-end, but forecasts a slight decline to below 3.5 million.

In April, the Angela Merkel administration decided to extend Kurzarbeit until 2012. The government had earlier extended it to the end of this year.

The companies are gradually approaching the limits of what they can do, also in view of their residual costs, so the unemployment rate will probably continue to inch up in 2011. Whichever way you look at it, though, this would still be a German success story.

Unemployment in Germany declined sharply in April confirming the underlying strength of the labour market as the recovery gains momentum. The jobless total fell by a seasonally adjusted 68,000 to total 3.285 million. The latest month's decline is the biggest since January 2008, when it fell by 83,000. The labour agency attributed the drop to the unexpectedly strong spring revival.

There is still a slight chance that unemployment rises again as many workers' "Kurzarbeit" subsidies expire.

In its latest assessment released this week, the European Commission pointed out that recent wage agreements in both private and public sectors suggest only moderate wage growth for this year and next. This reflects the prime concern of the social partners to stabilize employment levels and avoid a strong rise in unemployment. Hence, the commission expects real unit labour costs to fall again in 2010 and 2011, but not to fully compensate the strong hike in unit labour costs in 2009. The Federal Statistical Office had cited the decline in the number of hours worked due to the reduction in overtime hours on working time accounts as well as short-time work as the reason for a strong increase in labour costs per hour worked in 2009.

As the money paid under the short-time work scheme reaches consumer directly, it flows to the market instantaneously.

According to the many reports I have read, this was yet another reason that propped up consumer spending, a linchpin of the German economy.

An industrial recovery in Germany led by a continued rebound in exports should help underpin the resilience in the labour market, improve capacity utilization and lay the basis also for stronger domestic demand, the European Commission said. Germany's labour market outlook is markedly better than in previous forecasts, the commission said, which expects only a moderate increase in unemployment and limited job losses for 2010 and 2011. The unemployment rate, as per Eurostat definition, is forecast to rise to 7.8% this year from 7.5% in 2009 and to remain flat next year.

Hopefully this answers any questions that people may have as to whether German's labour market looks resilient enough to weather the next 12-18 months.

From the research I have done and the people 'in the know' I have spoken to, I actually think Germany will come through this problem far less troubled than some of its Eurozone counterparts!

Talking of one of them, Austria. Who would have thought that Austrian banks would this week find themselves in the crosshairs of the IMF?

Austrian banks' exposure in emerging Europe remains a risk for public finances and adds to pressure on the government to cut "unsustainable" deficit and debt levels, the International Monetary Fund said on Tuesday.

While this year's deficit of 4.7% and the debt level of 70% are better than the Euro zone average, the government needs to make sure it can deal with tensions which may arise because of its banks' vulnerabilities, the IMF said.

"There is no room for complacency," said Claire Waysand, the head of an IMF mission to Austria which led the annual Article IV consultations the Fund holds with every member.

"We have seen episodes in the past where the cost of borrowing for the government increased because of concerns about financial stability in the region," she said at a briefing in Vienna. "The government should err on the side of caution."

The extra interest Austria has to pay compared with Germany rose to a record level of 140 basis points last year, at the time surpassing the spread of Italy's government debt, when concerns about emerging Europe were at their peak.

The spread has since dropped, to 61 basis points on Tuesday, but is still much higher than that of other European AAA-rated sovereigns. Waysand said tensions like last year could recur and make consolidation as well as close bank supervision crucial for Austrian authorities.

"Consolidation has to start, as planned, next year. The government has to make sure the deficit is brought below 3% by 2013. And then the deficit will have to continue to decrease," she said.

The IMF's findings were presented at a news conference held jointly with Austrian central bank governor Ewald Nowotny.

UniCredit's Bank Austria, Raiffeisen International and Erste Group Bank are the biggest banks by some distance in the former Communist part of Europe.

The banks' capitalisation and leverage ratios have improved since last year, partly thanks to state capital injections, but the IMF said the rise of bad debt was not over and banks should make writedowns big enough to cover future losses.

Waysand and Governor Nowotny also reiterated the need to curtail loans in foreign currencies, a practice popular in both Austria and emerging Europe that has created big currency risks from unhedged borrowers for Austrian banks.

Austria - one to watch in the coming months I feel; how do you add an 'a' to the PIGS acronym? GAIPS?

On to the numbers on the boards for the week that was:

US Markets

How the US did this week .....

US Summary US stocks closed lower for the second consecutive week on Friday with a number of disappointing economic reports weighing on investor sentiment.

In the three months to the end of June, the S&P 500 index recorded its worst quarterly performance since the third quarter of 2008.

Private payrolls, which exclude government workers, failed to beat analyst expectations, rising by 83,000. Total non-farm payrolls fell by 125,000 but that included a 225,000 fall in census workers.

However, the numbers were not as bad as some traders were expecting, said Burt White, chief investment officer at LPL Financial. "The Street had priced in the worst-case scenario, and it didn't get it."

The market is close to bottoming out and should rally as the next earnings season starts, Mr White said.

At the close on Friday, the S&P 500 was down 0.5% to 1,022.58, and 5% lower on the week.

The Dow Jones Industrial Average lost 0.5% to 9,686.48, and fell 4.5% during the week. The Nasdaq Composite dropped 0.5% to 2,091.79, leaving it 5.9% lower on the week.

Drugmakers were among the best performing stocks in the S&P 500 on Friday following reports that Sanofi-Aventis, France's biggest pharmaceutical company, is preparing a significant acquisition in the US that could be worth up to $15bn.

Allergan rallied 7.2% to $62.29 on Friday, Biogen Idec added 5.8% to $49.42 and Genzyme advanced 5.9% to $52.80.

Eli Lilly advanced 1.7% to $33.67 on Friday after the drugmaker said it had agreed to buy Alnara Pharmaceuticals, a privately-held Massachusetts-based biotechnology company developing protein therapeutics for the treatment of metabolic diseases.

US-listed shares in BP rose 8.6% on the week to $29.35 as the relief wells to stop the worst oil spill in US history progressed ahead of schedule and the clean-up effort dodged a direct hit from Hurricane Alex earlier in the week.

It was the first weekly gain the stock has posted since the oil spill began in April.

Emerson Electric was down 0.6% to $43.42 on Friday after the board of Chloride, a London-listed power supply systems maker, recommended a $1.5bn takeover by the US conglomerate, bringing to an end a drawn-out bid battle.

Tesla Motors, an electric car company that has yet to make a profit, priced its initial public offering above its forecast range to raise $226m on Tuesday.

Its shares were up 40.5% on their first trading day, before falling back to to end the week only 3.2% higher than the initial price. The maker of the $109,000 Roadster sold 13.3m shares at $17 each after offering them in a range of $14-$16.

Google was 0.7% lower on Friday at $436.55 as it announced a $700m acquisition of ITA Software, a travel technology group, opening a new front in its battle with Microsoft. The deal is among the search company's biggest acquisitions and could give it influence in a key area of online commerce.

Microsoft's own relative success in travel search could help Google clear the antitrust process.

Morgan Stanley fell 1.1% to $22.83 on Friday as the bank said it had sold City Mortgage Bank, its Russian mortgage unit, to Orient Express Bank for an undisclosed amount. Morgan Stanley bought Moscow-based City Mortgage in 2006.

Dell was flat at $12.03 on Friday after the personal computer maker said it had agreed to buy Scalent, a private data centre software company, for an undisclosed sum.

The deal is aimed at boosting Dell's existing offering of servers, storage and network platforms.

European Markets

What has been happening in Europe this week .....

Europe Summary Most European stocks gained as an unexpected decline in the US jobless rate reassured investors about the health of the world's largest economy.

BHP Billiton Ltd., Rio Tinto Group and Xstrata Plc increased after the Australian government scaled back a proposed tax on mining companies. Dana Petroleum Plc jumped 22% after the Scottish oil explorer received a takeover approach from Korea National Oil Corp. Genmab A/S surged 46% after a revised agreement with partner GlaxoSmithKline Plc reduced the risk of a new share sale.

The Stoxx Europe 600 Index closed little changed at 237.27 as two stocks gained for each one that fell. The gauge has retreated 4.5% this week, extending the drop since from this year's high on April 15 to 13%. The decline has pushed the measure's valuation to 11 times reported earnings, the lowest level since 2008.

National benchmark indexes advanced in 13 of the 18 western European markets. The UK's FTSE 100 rose 0.7% and France's CAC 40 gained 0.3%. Germany's DAX fell 0.4%.

GERMANY

German stocks fell, extending their second straight weekly decline, as Bayer AG retreated and Goldman Sachs Group Inc. recommended ending a bullish stance on the benchmark DAX Index.

Bayer dropped 2.6% as UBS AG cut its price estimate on Germany's largest drugmaker. Deutsche Telekom AG declined 1.9%. Deutsche Boerse AG climbed 2.9% as Morgan Stanley recommended the shares. HeidelbergCement AG, the world's third-largest cement manufacturer, rose 1.6%.

The benchmark DAX Index retreated 0.4% at 5,834.15, after gaining as much as 1.4%. The gauge lost 3.9% this week and is down 7.9% from its April 26 high on concern the sovereign-debt crisis in Europe will spread. The broader HDAX Index dropped 0.3% Friday.

Bayer, Fresenius

Bayer dropped 2.6% to 44.38 Euros. UBS AG cut its price estimate on Germany's largest drugmaker to 49 Euros from 52 Euros, keeping a "neutral" rating.

Fresenius Medical Care AG, the world's biggest provider of kidney dialysis, fell 2.1% to 42.95 Euros.

Deutsche Telekom, Europe's biggest phone company, lost 1.9% to 9.53 Euros.

Shares of software company SAP AG lost 1.6% to 35.86 Euros.

Deutsche Boerse gained 2.9% to 50.3 Euros. The operator of the Frankfurt exchange was upgraded to "overweight" from "equal weight" at Morgan Stanley.

The new recommendation reflects "improving top-line dynamics and our expectation that continued volatility will support derivative volumes on a prospective basis," the brokerage said in a note.

HeidelbergCement rose 1.6% to 37.83 Euros. CA Cheuvreux kept the stock as one of its top picks in the European cement industry after a report Thursday showed construction spending in the US fell less than forecast in May.

"We continue to prefer stocks with high US sales exposure," the brokerage wrote in a note Friday. "While we understand the resurgence of double-dip fears in the market, the structural upside remains bigger in America than anywhere else."

ThyssenKrupp AG advanced 1.9% to 20.19 Euros. Goldman Sachs upgraded the nation's largest steelmaker to "buy" from "neutral," citing an "attractive growth profile and end-market exposures."

German retail sales picked up in May after declines in previous two months. But, high volatility of retail sales data casts doubt on the view that the sluggishness in domestic demand is fading.

Calendar and seasonally adjusted retail sales in real terms rose 0.4% month-on-month in May, the Federal Statistical Office said Thursday. That was in line with economists' expectations and was the first rise in three months. The statistical agency revised April's retail sales figure to show a decline of 0.5% versus a 1% rise reported initially. In nominal terms, sales grew 0.1%, reversing a 0.4% decline in April, which was revised from a 1.5% rise estimated earlier.

On an annual basis, real retail turnover fell for the second consecutive month. Sales dropped 2.4% in May after a 3.6% decline in April. The fall exceeded economists' expectations for a mild decline of 0.6%. In nominal terms, turnover was down 1.4%, slower than previous month's fall of 2.4%. Compared with the previous year, turnover in retail trade declined 0.4% in nominal terms and 1.3% in real terms in the first five months of 2010 from the year before, the statistical agency said.

The German economy, which is the biggest in the Euro area, is moving towards a safer-zone from the European debt crisis. Recent surveys suggested that consumer sentiment would be stable in July and business climate unexpectedly rebounded in June.

But, consumer revival won't be strong as the moderate fiscal tightening, which is set to begin next year, starts to dent households' incomes. Moreover, Germany faces the risk of a rise in the number of unemployed this autumn when subsidies for the thousands of workers registered in 2008 expire. Germany's Bundesbank expects the unemployed to total 3.4 million in 2011, corresponding to 8% of the labour force. Thursday, official data showed the seasonally adjusted number of unemployed fell 21,000 to reach 3.23 million in June.

However, recent positive developments brightened the prospects for the economy. On June 23, the Essen-based RWI economic research institute said the German economy is likely to expand 1.9% this year, better than the 1.4% growth predicted in March. The Institute for Macroeconomic Research retained the growth forecasts for Europe's biggest economy. The think-tank expects the economy to grow 2% in 2010, confirming its December

FRANCE

France's benchmark CAC 40 Index rose 9.7, or 0.3%, to 3,349.6 at 12:19 p.m. in Paris. The SBF 120 Index gained 0.3%.

Beneteau, the world's biggest sailboat maker gained 3.6% to 11.09 Euros. Beneteau Thursday said third-quarter revenue rose to 316.7 million Euros ($397 million) from 272.3 million Euros a year earlier and confirmed its full- year operating profit forecast.

BNP Paribas, France's biggest bank by assets increased 1.4% to 44.11 Euros. BNP and BPCE SA agreed to form a partnership to share information-technology investments and costs at their consumer credit units in France. Also, Apax Partners LLP agreed to buy the company's Belgian credit-card unit for an undisclosed sum, according to L'Echo.

Edenred - Shares in the services unit of Accor SA (AC FP) started trading in Paris Friday and were trading at 14.24 Euros, from a reference price of 11.40 Euros.

Sanofi-Aventis, France's biggest drugmaker fell 2.1% to 47.23 Euros. Sanofi's CGT labour union representatives called for a strike July 5 and 6 to protest planned job cuts. Also, the US House of Representatives approved a measure limiting the ability of pharmaceutical companies to make agreements that regulators say keep generic drugs off the market.

The French manufacturing sector growth eased further in June, data from Markit Economics showed Thursday. The weaker PMI figure reflected slower expansions of both output and new orders during June, alongside a sharper decline in employment.

The seasonally adjusted Purchasing Managers' Index fell for the second month running to 54.8 from 55.8 in May. That was its lowest reading since December 2009. The flash reading for June was 54.9.

Manufacturing production continued to grow in June, extending the current period of expansion to one year. The output growth moderated in June mirroring a similar cooling in the pace of expansion of new orders. Backlogs of work also increased at a weaker pace in June.

Despite easing from May's near six-year high, input cost inflation remained substantial in June. Firms responded to higher input prices by raising their prices charged to customers for the third consecutive month, the survey showed.

BELGIUM

In Brussels the Bel 20 ended the trading session Friday at 2,337.29, a slight gain of 0.05%.

Belgium's RHJ International said it plans to target further finance sector deals after restructuring measures offset lower sales of automotive parts and helped it swing to a full-year profit.

The holding company said on Wednesday full-year profit was 501.9 million Euros ($614.1 million) compared with a loss of 1.04 billion last year, helped by restructuring at Asahi Tec, Honsel and Niles, its majority owned automotive components companies.

RHJ, which is seeking to turn itself into a financial services company, said it plans to continue buying wealth management companies and will gradually exit its industrial holdings over time.

Its cash and cash equivalents at the end of its financial year were 405.5 million Euros compared with 466.3 million last year.

It bought UK wealth management unit Kleinwort Benson from Commerzbank in October for 225 million Pounds ($338.6 million).

Belgium's annual inflation accelerated in June to reach the highest rate in eighteen months, driven by higher energy prices, official figures showed Tuesday.

The consumer price inflation quickened to 2.46% in June from 2.27% in May, the National Institute of Statistics said. The rate of inflation rose for the ninth consecutive month and stood at the highest level since January 2009, when inflation was 2.32%, the agency reported.

The rise in the consumer price index was mainly driven by an increase in energy prices. Energy prices have been steadily increasing since September 2009, when the index was down 20% annually, the agency noted.

Prices increases in natural gas, mobile communications, overseas travel, fire and car insurances were offset by lower prices of cut flowers, vegetables, fuel and heating oil. Prices of natural gas climbed 2.2%year-on-year in June, while prices for fresh vegetables was 9.2% lower than the same period last year.

On a monthly basis, CPI was down 0.01% to 113.77 points, leaving the index almost unchanged. The core inflation rate stood at 1.25% in June and was at 1.22% compared to last month.

Official data had shown that Belgium's gross domestic product increased 0.1% on a sequential basis in the first quarter, slower than the 0.3% gain in the previous quarter. The GDP increased for the third consecutive quarter. A year earlier, the GDP slipped 1.7%.

THE NETHERLANDS

The AEX in Amsterdam closed out the week Friday on 308.20, up 0.11%.

Members of the FNV trade union federation have given their approval to plans to reform the Dutch pension system worked out by union officials and employer representatives.

The plan envisages an increase in the state pension age from 65 to 67 and was supported by 80% of the 160,000 people who voted.

The deal, which has not been finalised, involves an increase in the pension age from 65 to 66 in 2020 and possibly to 67 in 2025, depending on life expectancy developments. Both state pensions (AOW) and corporate pension schemes would be affected.

Although it will be up to the next cabinet and parliament how to implement the increase, the union and employer agreement is likely to be influential on those efforts. Most parties agree the pension age must be put up.

The Dutch central bank did not do its best in the way it granted Dirk Scheringa's independent bank DSB a licence, central bank president Nout Wellink admitted to MPs on Wednesday evening.

Wellink was being grilled about the official report into the collapse of DSB, which said the bank should never have been licensed, and heavily criticised the central bank's role.

'Yes, it could have been done better,' Wellink was quoted as saying in the Volkskrant. The central bank should not have 'just' given a banking licence to DSB he said. 'Not considering what we knew then and not with what we know now.'

He also admitted that the central bank had been slow to get tough on DSB once problems began to emerge. But he defended his staff for doing what could 'reasonably' be expected of them.

And, he said it was doubtful that they would have been able to refuse the licence anyway, Trouw reported.

Caretaker finance minister Kees Jan de Jager has told Wellink the bank needs to come up with a plan to drastically improve its operations within one month. Wellink told MPs he was the right person to carry out that process.

'When I came, the central bank was in the Middle Ages,' Wellink said. 'The bank is now more open and more transparent. I am the embodiment of that change.'

Dutch manufacturing activity slowed modestly in June but the sector remains in sound health, survey data shows.

Markit Economics announced that the NEVI manufacturing purchasing managers' index stood at a seasonally adjusted 55.9 in June. A reading above 50 indicates expansion, while one below suggests contraction.

Dutch manufacturing output rose in June, although more slowly than in the previous seven months. This was fueled by a rise in the intake of new orders. Respondents cited demand from the external sector, which was aided by the weak Euro, for the faster rise in new work.

Employment levels in the manufacturing sector were raised at the fastest pace in two years. Those respondents that reported a rise in staffing levels during the month attributed the staffing increase to capacity pressures.

Average input costs faced by Dutch manufacturers rose substantially in June, albeit at a weaker pace than in the previous month. Higher prices for a range of raw materials and fuel were mentioned as major contributory factors. Output prices charged by manufacturers also rose sharply as companies attempted to pass on their input cost burden to consumers.

SWITZERLAND

Zurich's SMI headed into the weekend at 5,974.30, down 0.12%.

Switzerland's SVME purchasing manager's index dropped in June from a historic-high recorded in May, but continued to signal growth in the country's industrial sector.

The PMI fell to 65.7 in June from May's 66.4, a joint report by the SVME Association of Purchasing and Materials Management and Credit Suisse showed Thursday. That was in line with economists' expectations. But, the reading continued to stay above the no-change mark of 50 for the tenth straight month to suggest continuing expansion in the sector.

Industrial output rose at a slower pace in June, with the corresponding indicator falling to 64.4 from 70.4. But, it continued to stay above its long-term average of 55.1 points. Growth in the backlogs of orders eased for the third consecutive month. The relevant indicator slipped to 67.4 in June from 68.6 in May.

Corporate purchasing in June was higher than in the previous month, with a rise in the indicator to 64.4 from 62.2. The purchasing prices subindex edged up by 0.9 points in June. At 65.4 points, it was thus above the 50-point growth threshold for the tenth consecutive month. Some degree of price pressure is clearly being felt.

Thanks to a sharp rise of 5.1 points, the suppliers' delivery times component advanced to a new all-time high of 80.6 points in June. The unexpectedly fast recovery in demand seems to be pushing capacity utilization up to the extent that delivery bottlenecks are arising.

Further, the stocks of purchases subcomponent dropped back significantly in June but, at 52.6 points, was still above the growth threshold. Companies are evidently taking a more cautious approach to replenishing their stocks -revealing a degree of skepticism about the sustainability of the current upturn in orders. The stocks of finished goods subcomponent again closed the month below the growth threshold. Companies have now been scaling back these inventories for nineteen straight months.

Employment rose in June for the fourth month in succession. In fact, it even redoubled its momentum. The employment component of the PMI gained 3.8 points within the growth zone to stand at 59.9 points, a level reminiscent of the months before the recession. The unexpectedly fast recovery in demand seems to be pushing capacity utilization up so rapidly that more staff are being hired.

Switzerland's KOF Economic Institute on Wednesday showed the economic barometer climbed in June to the highest level since August 2006.

The leading indicator in June moved up to 2.25 from 2.16 in May. Economists had expected the index to remain at 2.16 in June. The latest reading suggests that the recovery of the Swiss economy will continue in months ahead.

Earlier this month, the KOF said the economy will grow 1.8% this year. For 2011, the institute expects weak economic growth on account of uncertain developments in Europe and the strength of the Swiss Franc. Growth is set to ease to 1.6% in 2011, the think tank said. The central bank, at the same time, expects 2% economic growth for this year.

UBS bank's consumption indicator for Switzerland rose only slightly in May. The consumption indicator stood at 1.74 in May, up from a revised 1.73 in April, the bank said on Tuesday. The indicator signals private consumption trends in Switzerland with a lead of about three months of the official figures.

The index is based on five sub-indicators, namely new car registrations, business activity in the retail sector, the number of overnight stays in domestic hotels by Swiss nationals, the consumer sentiment index, and credit card transactions processed by UBS at points of sale in Switzerland.

The flattening out of the indicator in May was attributed to a sharp decline in business activity in the retail sector. The UBS, however, expects the current flattening out to be temporary and the indicator to rise to the level of consumption growth in the months ahead. Further, data showed that consumer sentiment improved in May and new car registrations continued to record growth.

AUSTRIA

The ATX in Vienna completed a volatile week, closing on 2,233.75, up 0.28% for Friday's session.

Austria's current deficit and debt levels are "not sustainable," the International Monetary Fund said in its preliminary findings following the annual mission to the Alpine nation, although it noted that the country has more favorable debt and deficit levels than the Euro area average,

The IMF said Austria's fiscal deficit is expected to be at 4.75% of GDP in 2010 and debt should be constrained to around 70%.

The government should ensure that the debt is back on the downward path and the deficit should be bought below 3% of GDP by 2013, the IMF said. It needs to be bought further down thereafter, the organization added.

Though the mission pointed out that the country's economy is recovering from recession, the organization handed out a three-fold recommendation to reign in the current risks.

Austria should start fiscal consolidation in 2011 to bring the deficit below the EU limit by 2013. It should further strengthen the financial stability and needs more structural reforms to reinforce growth potential, the IMF noted.

"Raising a few taxes that are currently low in an international comparison could bring additional benefits," the mission observed.

Though the tax burden is already high, the IMF said there is room for vast consolidation measures to reduce expenditures without weighing on growth, as spending is elevated in international comparison and with outcomes not always commensurate.

The mission warned that Austrian banks are subject to significant foreign exchange risk from unhedged borrowers, including those in Austria. The IMF said the government, in coordination with other supervisors, should implement and enforce tighter fx-lending standards to help insulate these banks from external risks.

"Market tensions may arise in case of adverse developments. This also calls for strong supervision to address remaining vulnerabilities in the financial sector," the IMF noted.

The European Commission on Friday extended aid schemes for credit institutions in Austria and Latvia. The extended schemes feature higher premiums to be paid by banks to the state for guaranteeing the loans they raise on the market. This is to encourage banks to finance themselves without state support and to limit distortions of competition, the commission said in a statement.

The Commission extended the aid scheme for Austrian credit institutions until December 31 2010. The extended support package includes higher premiums for the state guarantee according to a bank's creditworthiness, in order to provide an incentive for banks to refinance themselves on the markets without state support and to limit distortions of competition. The Commission said the extended measures are well targeted, proportionate and limited in time and scope.

The Commission also authorized the extension until 31 December 2010 of a scheme to support banks in Latvia. As in the case of the Austrian scheme, the extended measures are considered well targeted, proportionate and limited in time and scope. As in the case of the Austrian scheme, the extended measures are considered well targeted, proportionate and limited in time and scope.

The vast majority of support schemes for financial institutions, put in place at the end of 2008 to ensure financial stability at the height of the financial crisis, expire at the end of June. They have been periodically extended, generally for six months, when requested by the member states concerned and justified. To be extended, the fees charged by government need to be increased and the banks that continue to rely heavily on such guarantees for their financing should undergo a viability review.

The Commission has already extended under these conditions bank support schemes in Sweden, Germany and Hungary. The extensions are for six months, until the end of 2010.

Production in the Austrian industry increased 9.6% year-on-year in April, the Statistics Austria said Thursday.

Construction output dropped 3.4% annually during the month. Austria's working-day adjusted production index rose 6.9% year-on-year in April. Manufacture of intermediate goods climbed 13.5%. Production and supply of energy-related products increased 9.4% annually. Production in non-durable goods and capital goods segments advanced 3.3%, while durables production declined 2.5%.

On a monthly basis, the production index rose a seasonally adjusted 2.5%. Industrial production grew 2.8%, while construction output gained 1.8%. Month-on-month, there was a 4.7% increase in energy output and 2.4% rise in intermediate goods' production. Capital as well as consumer goods also recorded an increase in production.

The Alpine economy grew 0.4% annually in the first quarter, rebounding from a 1.2% contraction in the preceding quarter. Official figures have shown that producer price inflation in Austria accelerated to 2.5% annually in April from 0.4% increase in March, due to higher producer prices of energy.

Meanwhile, a rapid recovery in the global trade had prompted the Austrian central bank to raise its 2010 growth forecasts. The Oesterreichische Nationalbank now expects economy to grow 1.6% this year and 1.8% in 2011. The economy had shrunk 3.4% in 2009.

SWEDEN

Stockholm's OMX finished the week at 983.30, a gain of 0.18%.

The Swedish central bank hiked its key interest rate for the first time since September 2008 to cool the economy. The central bank altered the interest rate path projection and also raised its economic growth forecast for 2010.

The Executive Board of the Riksbank in a split vote decided on Thursday to hike the repo rate by 25 basis points to 0.5%, effective from July 7. The repo rate is the rate at which banks can borrow or deposit funds at the Riksbank for a period of seven days.

The repo rate needs to be raised gradually towards more normal levels to attain the inflation target of 2% and to ensure stable growth in the real economy, the Riksbank said in a statement. Policy makers noted that inflationary pressures stayed at a low level and household indebtedness increased significantly in recent years.

Deputy Governor Karolina Ekholm entered a reservation against the latest decision to raise the interest rate, in view of the increased uncertainty prevailing as regards the sovereign debt problems in the Euro area. The minutes from the monetary policy meeting will be published on July 15.

The central bank also changed its repo rate path outlook. The quarterly average rate is now seen at 0.9% in the fourth quarter of this year, compared to the prior 0.7% estimate. Meanwhile, the average rate forecast for the third quarter of 2012 was lowered to 3.1% from 3.5%. The downward revision was driven by concerns over the ongoing debt crisis in the Euro area.

Deputy Governor Lars Svensson entered a reservation against the repo rate path. The rate-setter advocated a path with a repo rate of 0.25% through the fourth quarter of 2010.

The weaker development of the economies of the Euro area means that the repo rate in the longer term is not expected to be raised as rapidly as was previously assumed, the central bank said. The strong growth in the Swedish economy may on the other hand turn out to be more powerful than expected, and then the repo rate may need to be raised at a faster pace in the period ahead.

The economy is forecast to grow 3.8% this year, up from the previous estimate of 2.2%. However, the outlook for 2011 was lowered slightly to 3.6% from 3.7% and the estimate for 2012 to 2.8% from 3.1%. Annual inflation for 2010 is seen at 1.2% and 2% next year. The previous forecast for 2010 was 1.1% and that for 2011 was 2.1%.

In June, the National Institute of Economic Research had raised its growth outlook for 2010 to 3.7%, citing the expansionary fiscal policy and a rapid upturn in external demand. Growth is forecast to ease to 3% next year.

Swedish manufacturing sector continued to expand for the thirteenth consecutive month in June, but at a weaker rate compared to May, a report by the Swedbank and SILF showed on Thursday.

The headline seasonally adjusted Swedbank/SILF manufacturing PMI fell to 62.4 in June, the lowest reading in three months, from 66 in May. Economists were expecting a PMI reading of 64. A PMI reading above 50 suggests expansion of the sector, while a reading below 50 suggests contraction.

The slow-down in manufacturing activity was mainly due to weaker growth of new orders and production, the report said. Among the sub-indices, new orders index fell to 61.1 in June from 68.8 in May, thus making the biggest negative contribution to the overall index. The index stood at its lowest level since November last year, the report said. Index of stock-orders fell to 60.9 in June from 64.3 in the previous month.

Production index dropped to 66.8 in June from 71 in May. Despite the decline, majority of the firms reported increased output for the second quarter. Index of production plans was broadly unchanged at 73.1 during the month compared to 73 in May. This indicates that industrial firms' production plans remained accommodative for the next six months, despite concerns about a weaker economic growth.

Employment continued to rise with the index advancing by 0.2 points to 60.3 in June from the previous month. The latest reading is the highest since 1995, although the actual level of employment is significantly lower. Improvement in job creation was largely driven by improved order situation and growing production plans.

Meanwhile, the Executive Board of the Swedish central bank, during its meeting Friday, decided to hike the repo rate by 0.25 of a percentage point to 0.5%. The central bank also raised its economic growth forecast for 2010 to 3.8%. The economy grew 1.4% sequentially in the first quarter, following a revised 0.4% expansion in the fourth quarter of 2009.

Sweden's trade surplus significantly dropped in May from the previous month, defying forecast for an improvement, the statistical office said on Monday.

The trade surplus stood at SEK 2.7 billion in May, narrowing from SEK 6.4 billion surplus in the previous month, which was revised from SEK 6.9 billion reported initially. Economists' had expected a trade surplus of SEK 7.8 billion. A year earlier, the trade balance showed a surplus of SEK 8.1 billion.

Exports value increased 16% on an annual basis to SEK 91 billion in May, while imports value rose 26% to SEK 88.3 billion. On a seasonally adjusted basis, the net trade surplus amounted to SEK 4.5 billion in May, down from SEK 4.7 billion surplus in the previous month.

For the first five months of the year, the value of exports increased 9% from last year, while imports climbed 13% compared to the corresponding period of the previous year. During the period, the net trade surplus increased to SEK 25.4 billion from SEK 39.3 billion a year ago.

The trade with countries outside the EU showed a surplus of SEK 8.4 billion in May compared to SEK13 billion in April. The EU trade resulted in a deficit of SEK 5.7 billion versus SEK6.6 billion in the previous month, the Statistics Sweden said.

Sweden's economic growth accelerated in the first quarter. The economy grew 1.4% sequentially in the first quarter, following a revised 0.4% expansion in the fourth quarter of 2009. Last week, the National Institute of Economic Research, or NIER, raised its GDP growth forecast for 2010 to 3.7% from the March estimate of 2.4% growth.

"The Swedish economy is on the road to recovery," the NIER said in a report published Wednesday. "The turning point has been passed with the aid of an expansionary economic policy and a rapid upturn in demand for Swedish exports of goods."

However, the NIER said the economy faces a considerable threat associated with the problems in the Eurozone. Subsequently, the NIER said its growth forecast for 2011 has been revised down to 3% from the previously estimated 3.8%.

NORWAY

The OBX in Oslo rounded out the Friday session on 298.80, up 2.72%.

Operating conditions across the Norwegian manufacturing sector continued to improve for the third successive month in June, driven by the growth in new orders and production, Fokus Bank and the Norwegian Association for Purchasing and Logistics said Thursday.

The headline seasonally adjusted NIMA purchasing managers index rose to 51.2 in June from 50.4 in May. Economists were expecting the index to post a reading of 50.5. A PMI reading above 50 signals expansion in the sector, while a reading below 50 suggests contraction.

While an increase in new orders and production added momentum to the overall growth of the sector, stocks of purchased goods acted as a major drag. The orders index rose to 51.8 in June from 47.8 in the previous month mainly due to an increase in new orders from the domestic market. The production index rose to 53.5 during the month from 50.3 in the previous month. The latest reading is the highest since July last year.

The employment index rose to 48.5 in May from 45.6 in April, still pointing to considerable deterioration in labour conditions in the sector. There are no signs that manufacturing employment is increasing, the report said. The index for the inventory of purchased goods dropped to 46.7 from 55.7 in the previous month.

Official figures showed that the Norwegian economy contracted 0.1% on a sequential basis in the first quarter, reversing the 0.1% growth in the previous quarter. Last month, a report from the central bank showed that firms expected output growth to pick up in the second half of this year.

The Norges Bank report, designed to study financial developments in enterprises and industries, had found that activity has risen most in the export industry and retail trade and prospects of domestically oriented manufacturing are bleak compared to other sectors.

Norway's retail sales volume increased smaller than expected in May.

The seasonally adjusted retail sales volume increased 0.2% on a monthly basis in May, a report by the Statistics Norway said on Wednesday. Economists' had expected an increase of 0.6%. At the same time, retail sales, excluding petrol stations slipped 0.1%.

On an unadjusted basis, retail sales volume, excluding motor vehicles dropped 3.2% year-on-year in May. At the same time, excluding petrol stations, sales volume slipped 3%.

For the first five months of the year, retail sales volume, excluding motor vehicles increased 0.9% compared to the same period of the previous year. Excluding petrol stations, sales grew 1.5% during the period.

Meanwhile, retail sales value, excluding motor vehicles decreased 1.6% annually in May, while retail sales, excluding petrol stations fell 2.2%.

FINLAND

The OMX in Helsinki limped into the weekend at 6,176.63, a gain 0f 0.68%.

Finnish manufacturing confidence indicator dropped in June from the previous month, a latest report by the Confederation of Finnish Industries EK showed on Monday. Meanwhile, official data showed that consumer confidence rose to a near three-year high.

The business confidence index declined to 5 in June from a revised 8 in the previous month. The long-term average of the index stood at 3. Meanwhile, stocks of final goods increased in June and steady production growth is expected for the next few months. Order books were slightly smaller than average.

The confidence index for the construction sector slightly dropped in June. The indicator fell to minus 23 from a revised minus 16 in May. The index reading was below its long-term average.

However, the sentiment indicator for the service sector improved to 19 in June from a revised 17 in the previous month. The long-term average of the index stood at 16. Moderate sales growth is forecast for the next few months and the overall business situation is relatively positive, the EK said. Similarly, the gauge measuring the sentiment among Finland's retail trade companies rose to 17 from a revised 10 in May.

Separately, the Statistics Finland said Friday that the consumer confidence indicator recorded its strongest reading since August 2007. The confidence indicator stood at 18.7 in June, up from 15.8 in the previous month.

Consumers' confidence on households' saving possibilities in the next 12 months improved to 50.5 in June from 49.3 in May, while consumers' assessment regarding the nation's economic performance in a year rose to 15.1 from 10. Consumers' view about the Finnish unemployment situation in 12 months time improved to minus 1 in June from minus 6.5 in the preceding month.

At the same time, consumers predicted that consumer prices would go up by 2.2% over the next 12 months and the long-term average inflation rate is 2.1%. A gauge for the favorable time for buying durable goods rose to 29.7 in June from 25.8 in May.

The Finnish economy slipped back into recession in the first quarter. The gross domestic product dropped 0.4% sequentially, following a 0.2% decline in the fourth quarter. The jobless rate continued to rise to 10.5% in May from 9.3% in April. Consumer price inflation accelerated for a third month in a row in May, reaching 1%.

Finnish consumer confidence indicator recorded its strongest reading in almost three years, the statistical office said on Monday.

The consumer confidence index stood at at 18.7 in June, up from 15.8 in the previous month. The confidence indicator was significantly better than the long-term average and the strongest since August 2007.

Among the major sub indicators, the consumer confidence on households' saving possibilities in the next 12 months improved to 50.5 in June from 49.3 in May, while consumers' assessment regarding the nation's economic performance in a year rose to 15.1 from 10. Consumers' view about the Finnish unemployment situation in 12 months time improved to minus 1 in June from minus 6.5 in the preceding month. At the same time, consumers predicted that consumer prices would go up by 2.2% over the next 12 months and the long-term average inflation rate is 2.1%.

Meanwhile, a gauge for the favorable time for buying durable goods rose to 29.7 in June from 25.8 in May. A year earlier, the index was 36.1. Consumers' assessment on favorable time for saving increased to 18.4 from 16.5 in the previous month.

Finnish general government revenue decreased 0.4% year-on-year in the first quarter of 2010, the Statistics Finland said Wednesday. In Euro terms, government revenue fell by 0.1 billion. The decline was mainly driven by a fall in income tax and social contributions. Meanwhile, capital income contributed positively.

The government's expenditure rose 3.9% or by Eur 0.9 billion, with an increase in intermediate consumption, social benefits in cash and compensation of employees.

Due to the fallen revenue and risen expenditure, the financial position of general government weakened by Eur 1 billion from the respective quarter of the year before and stood at minus Eur 1.5 billion. General government is comprised of central government, social security funds and local government.

DENMARK

Copenhagen's OMX closed out the books Friday at 390.34, 1.72% up on the day.

The Danish economy expanded at a faster pace in the first quarter, but slower than its preliminary report, a final data from the Statistics Denmark showed on Wednesday.

The gross domestic product, or GDP grew 0.5% on a sequential basis in the first quarter, faster than 0.2% growth in the previous quarter. The latest GDP figure was revised down from 0.6% rise reported initially.

Private consumption expenditure rose 1.7% sequentially in the first quarter, larger than 0.7% growth in the previous quarter. Similarly, government spending increased 0.5%, faster than 0.3% in the previous three months. On the other hand, the gross fixed investment slipped 3.3% in the first quarter, following a 3% fall in the previous quarter.

Exports of goods and services increased 1.3% in the first quarter, faster than 0.1% in the previous quarter. At the same time, imports of goods and services rose 0.8%, after falling 0.7% in the fourth quarter. Total employment fell 0.4% versus 1.3% drop in the fourth quarter.

Year-on-year, the GDP decreased 0.4% in the first quarter, which was confirmed the preliminary estimate published on May 31. The private and government consumption expenditure increased by 0.5% and 1%, respectively.

Danish unemployment rate declined slightly to a seasonally adjusted 4.1% in May from 4.2% in April, Statistics Denmark said Thursday. At the same time, retail sales volume increased during the month after a steep fall in April.

The number of unemployed persons fell by 2,000 from April to reach 112,700 in May. Gross unemployment remained unchanged from April to May. During the period, while the jobless rate for women remained largely unchanged, unemployment rate for men continued to decrease.

Separately, the statistical agency reported that retail sales increased 3.7% in May after falling 4.4% in April. Sales of food and other groceries fell 0.2% month-on-month and that of clothing and related-items rose 3.8%. Trade of other consumer goods increased 7.3%.

Year-on-year, total retail sales increased 0.3% after a 7.2% drop in the previous month. The decrease in April was largely attributed to the specific placement of Easter during the end of March, pushing all holidays to April.

Confidence among Danish manufacturing enterprises diminished to a four-month low in June as the industry's business expectations over the next three months declined, official data showed Tuesday.

The headline seasonally adjusted overall outlook indicator slipped to minus 5 in June from minus 8 in May, the Statistics Denmark said. The latest reading is the lowest since February, when it was at 5. The decrease in the overall index is mainly due to a drop in firms' assessment of order backlogs in the coming three months and an increase in the evaluation of finished goods stocks during the period.

The index measuring the outlook of order books dropped to minus 7 during the month from minus 3 in the previous month, while the indicator for stocks of finished goods rose to minus 4 from minus 10 recorded last month.

The gauge measuring firms' expectations on production in the coming three months increased to a seasonally-adjusted 19 in June from 17 in May. On an unadjusted basis, the indicator rose to 18 in June from 16 last month. Meanwhile, industries' employment intentions fell slightly as the indicator recorded a reading of 3 in June compared to 4 last month. The indicator of expectations on increasing prices dropped to 8 from 12.