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Monday March 17, 2008 - 11:50:37 GMT
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European Market Update: Who's Next?

European Market Update: Who's Next?

· *** ECONOMIC DATA ***

· SZ Jan Adjusted Retail Sales Y/Y: 1.3% v 2.7%e

· EC Q4 Employment: Q/Q 0.2% v 0.3% prior || Y/Y 1.7% v 1.9% prior || Prior revised from 1.9% to 1.8%

· *** SPEAKERS/COMMENTS ***

· JP Morgan announced overnight that it will acquire Bear Stearns in a stock for stock exchange valuing Bear Stearns at $2/share, with a total value around $240M. Effective immediately, JP Morgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations. In addition to the financing the Federal Reserve ordinarily provides through its Discount Window, the Fed will provide special financing in connection with this transaction. The Fed has agreed to fund up to $30 billion of Bear Stearns' less liquid assets.

· The Fed cut the discount rate by 25bps to 3.25% overnight. The Fed also extended the discount window to investment banks. The Fed said that primary credit loans have been extended to 90 days from 30 days for at least six months or as conditions warrant. The steps are "designed to bolster market liquidity and promote orderly market functioning,'' the Fed said in a statement. "Liquid well-functioning markets are essential for the promotion of economic growth. ''

· Regarding the Fed's actions overnight WSJ Fed watcher Greg Ip said that the Federal Reserve's decision to invoke a Depression-era law so that it could lend to Bear Stearns shows how seriously it believes the financial system is at risk

· ECB Liikanen: Slower economic growth will damp inflation || Inflation situation will stabilize in 2009 || Medium- term price stability precondition for economic growth.

· SNB Chief Economist: CHF rise is a concern, too early to say if it will last || Adds that CHF rise partly due to correction of previous weakness and overall USD weakness

· *** FIXED INCOME/FX/COMMODITIES/ERRATUM ***

· The European indices are trading sharply lower across the board today. After the announcement of last Friday's joint liquidity offering from the Fed and JP Morgan, JP Morgan bought out Bear Stearns for $2/share in a $240M deal this weekend. The $2/share price compares to the $30 close on Friday. While the words “who's next” could be found in the middle of LPs spinning happily on countless record players in the summer of 1971, those same words are now being spoken by confused and nervous market participants. There has been some speculation that Lehman will be the next victim of the financial market crisis, however a spokesperson said overnight that the company's liquidity position is still strong. In
Europe overnight Deutsche Telecom announced that it will buy a 20% stake in Greece's Hellenic Telecome for around €2.6B. Sieman's announced that its earnings will be around €900M lower this quarter as a result of order delays and cancellations in its energy, transport, and technology units. Siemans shares are currently the biggest loser the Dax. Shares of UBS are currently the biggest loser in the SMI after a newspaper report said that the bank will cut up to 8,000 jobs and propose a capital increase. On the brighter side overnight shares of British Energy were sharply higher after the company announced that they were in talks on a possible new business combination for new atomic plants. British Energy said that talks could lead to an offer for the company. In the US Weyerhaeuser announced the sale of its packaging and recycling unit to International Paper for $6.0B in cash overnight. Looking ahead, earnings are expected from US notables Conseco, and Houston Wire & Cable in the US pre-market.

· There has been an aggressive steepening in European yield curves overnight as market uncertainty and a general feeling of panic continue to set the tone for trading activity. The panic comes after JP Morgan bought Bear Stearns at a 93.3% discount to Friday's closing price, and the Fed took action over the weekend for the first time since the 1980's. The Fed cut the discount rate by 25bps to 3.25% Sunday evening, and extended the discount window to investment banks. The Fed said that primary credit loans have been extended to 90 days from 30 days for at least six months or as conditions warrant. Regarding its actions the Fed said that these steps are "designed to bolster market liquidity and promote orderly market functioning”. There has been some speculation of a possible emergency ECB meeting in light of the recent market activity after ECB members Weber and Noyer cancelled a trip to Canada, however one has reported fallen ill and the other has to attend to a family emergency. While such speculation has been ongoing, it seems to be warranted more and more each day.

· The commodities have been relatively quiet overnight. Crude futures continue to hold on, trading above the $100-handle. OPEC President commented on what has been driving gains in oil prices overnight, reiterating that oil markets are rising due to speculation and the USD's fall and not a lack of petroleum. The Financial Times looked at recent trading of futures contracts for oil noting that every futures contract until Dec 2016 finished above $100/barrel last week for the first time. According to the Financial Times Qatar wants to split its LNG shipments equally amongst the
US and Europe by 2010. The move is aimed at reducing Qatar's exposure to big price swings. Nigerian oil workers union callls for sector strike from March 19 over a dispute at ExxonMobile. Merrill Lynch boosted its 2008 Brent price forecast to $100/barrel from $82/barrel overnight. Merrill boosted its 2009 forecast to $90/barrel from $70/barrel and its 2010 forecast to $85/barrel from $70/barrel. Merrill also Set 2008 Urals price forecast at $97/barrel, 2009 at $87/barrel and 2010 at $82/barrel. Elsewhere spot gold continues to benefit from safe haven flows, trading comfortably above the $1020-handle.

· In currencies the USD is off its worst levels seen at the Asian open following the duel announcements of an emergency 25bps cut in the Fed's discount Rate and the acquisition of Bear Stearns by JP Morgan. The EUR/USD briefly tested the 1.59-level overnight for fresh all-time highs before retracing back towards the 1.5800-level. There has been dealer chatter the Eastern European names continue to bid for Euros on the approach of the 1.5760-area. The USD/CHF hit 0.9640 before stabilizing at the 0-.98-area. The USD/JPY had a 95 handle following the FED and JP Morgan news. This level was last seen during a period of coordinated central bank action back in August 1995. Risk aversion theme is in full effect as both JPY and CHF are purchased. EUR/JPY cross-violated a 7-year up-trend line at the 154-area, open the possibility for downside momentum in this pair. The EUR/CHF is currently below the 1.55-level.


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