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Thursday June 26, 2008 - 12:07:56 GMT
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Forex Blog - European Market Update: BOE Confirms that its Rate Path is Uncertain


·GE May Import Price Index: M/M 2.4% v 1.5%e || Y/Y 7.9% v 6.9%e

·(m/m highest since Sep 1990; y/y highest since Dec 2000)

·FR June Consumer Confidence: -46 v -41e || Prior revised from -41 to - 42

·(lowest since 1987)

·GE June Saxony CPI: M/M 0.3% v 0.6% prior; Y/Y 3.4% v 3.1% prior

·SP Apr House Transactions: -7.1% v -38. 6% prior

·SP Apr Mortgages on Houses: -9.4% v -39.7% prior

·SP Apr Mortgage-Capital Loaned: -13.1% v -36.9% prior

·IT June Business Confidence: 87.1 v 88.8e || Prior revised from 89.6 to 89.4

·SW May PPI: M/M 0.1% v 0.5%e || Y/Y 2.9% v 3. 2%e

·GE June Hesse CPI: M/M 0.3% v 0.7% prior || Y/Y 3.8% v 3.5% prior

·EU May Euro-Zone M3 Y/Y: 10.5% v 10.4%e

·EU May Euro- Zone M3 3-Month Average: 10.4% v 10.4%e

·UK Q1 Final Total Business Investment: Q/Q -1.8% v -1.4%e || Y/Y 4.5% v 3.7%e

·IC June CPI: M/M 0.9% v 1.2%e || Y/Y 12.7% v 13.0%e

·(y/y is the highest since August of 1990)


·In equity news overnight Goldman Sachs cut its view on the US brokerage sector to Neutral from Attractive, adding Citigroup (C) to its “conviction sell list”. Goldman forecasted that Citigroup may have an additional $8.9B in writedowns in Q2. Goldman said that the
US brokers will take longer to recover than previously thought. Goodyear (GT) announced plans to close its Australian tire plant. Tyson (TSN) announced that it will sell its Canadian Beef operations to XL Foods for C$107M. Unicredit [UCG.IT] said overnight that it does not see any ABS portfolio writedowns in Q2, guiding its year-end core tier-1 ratio of 6.0%. The company also said that it is targeting a core tier-1 ratio of 7.1% in 2010. United Business Media [UBM.UK] said overnight that it sees 1H results modestly ahead of estimates, noting that 2009 key event bookings are in line with forecasts. The company also noted that it is well positioned to make selective acquisitions. Arriva [ARI.UK] said that they see group revenue up over 50% in the 1H, adding that the outlook for 2008 remains positive. DSG International [DSG.UK] reported a FY08 net loss of £260.8M, down from a profit of £5M a year ago. FY08 revenue was £8.55B, ahead of the £8.35B consensus, while pretax was in line with expectations at £205M. Renewable Energy [REC.NO] won a NOK2.0B contract to supply silicon wafers in China until 2015.

·In the newspapers, the Wall Street Journal wrote overnight that Anheuser (BUD) will reject Inbev's [INB.BE] $46.35B bid, arguing that the offer undervalues the company. The article notes that BUD is also planning its own restructuring plan. The Wall Street Journal commented overnight on the auction for GE's $30B credit-card unit, noting that thus far interest in the unit has been lukewarm due to credit concerns. According to the Globe & Mail, some of BCE's (BCE) shareholders are willing to forgo their dividend payments as they are more focused on the buyout of BCE and believe that the funds that BCE has set aside to pay dividends could be critical to winning lenders' support for the company's takeover offer.

·In energy news overnight the head of the Libyan National Oil Corp. Shokri Ghanem said that
Libya may cut oil production because the market is over-supplied. The oil official added that a cut would also come as a response to threats and intimidation against OPEC. Total [FP.FR] shut a unit at its Port Arthur Refinery (232K bpd) due to maintenance. Citgo's Lake Charles refinery (430K bpd) was reportedly restarted following a power outage. The New York Times wrote overnight that more offshore oil drilling may not reduce prices citing oil expert Amy Myers Jaffe. According to the article predicting the outcome of increased drilling is difficult because it is not clear how much oil is available offshore.

·In new supply overnight
Italy sold €1.0B in 1.85% I/L September 2012 bonds with an average yield of 2.26% and a bid-to-cover of 1. 78x, as well as €760M in 2.6% September 2023 bonds with an average yield of 2.73% and a bid-to-cover of 1.82x. The Wall Street Journal wrote overnight that end of the quarter cash hoarding is increasing tensions in Europe's short-term money markets. European banks are reportedly hoarding cash to ensure that their finances look secure as they prepare to report results over the coming weeks. The Wall Street Journal reported overnight that investment banks and hedge funds could lose billions this quarter due to the shift in European rates. The report cites bankers who say that the issue involves steepening trades, which are when banks make bets that long- term rates will rise in relation to short-term rates. Steepening trades became popular as expectations that central banks would lower rates started to rise.

·In currencies, the USD consolidated its post-FED rate decision losses against the major currency pairs. The EUR/USD held above the 1.5630 post G7 pivot point. The 1.5630-level was tested following weaker French consumer confidence data. The GBP/USD was firmer as the BOE commented about higher inflation in the short-term. The GBP/USD tested the 1.98-handle. Risk aversion has not appeared in the carry-related pairs despite cautious comments from Goldman Sachs on the
US brokerage sector. In currency related news Bank of America's head of Japanese economics and strategy said in an analyst note that he sees the EUR/USD moving to 1.60 on rate differentials. The time period of the analyst's forecast was not specified. A Russian central banker said overnight that the Rouble trading band may widen by 5% on each said, noting that the central bank will definitely increase interventions. The bank added that the Ruble change will spur a massive unwinding, adding that low rates in the US hurt the bank's inflation-target goal. Elsewhere Vietnam widened the Dong trading band to 2.0% effective on Friday.

·On the speaker front, in an interview with Il Sole 24 Ore JP Morgan's (JPM) CEO Jamie Dimon said that he expects a recession in the
US, as well as increased insolvencies to affect global growth. Dimon noted in the interview that the real risk today is the US economic crisis. Germany's IMK Think-Tank raised its 2008 GDP forecast to 1.8% from 1.3% overnight, and cut its 2009 GDP forecast to 0.9% from 1.5%. The think-tank expects ECB to raise rates by 25bps in 2008, and to cut rate by 50bps in 2009. Furthermore the think-tank said that the German economic upswing has come to a standstill. The German BDB Association said overnight that an interest rate hike would support ECB credibility, adding that a hike may have a big impact on inflationary expectations. Furthermore the BDB Association said that stagflation concerns are exaggerated, adding that inflation is seen slowing by the end of 2008. The Italian Industry Lobby said that it sees 2008 GDP growth at 0. 1%, and 2009 GDP growth of 0.6%. The Bank of England monetary policy committee testified on inflation in front of Parliament's Treasury Committee. Most of the comments, and the overall tone were in line with recent rhetoric over the past month including statements seen in Mervyn King's letter to the exchequer. The MPC noted that inflation is seen breaking the 4.0% mark in 2008, adding that wages developments and energy prices will play a key role in the coming months. The Bank of England's Beasley said that he is open-minded about the BOE's interest rate path, while the BOE's Barker said that the future interest rate path is highly uncertain.

·*** NOTES ***

·The German import price index for the month of May had the highest m/m reading since September of 1990 at 2. 4%, and the highest y/y reading since December of 2000 at 7.9%. Ex-energy the m/m reading was 0.6% for a measly 3-month high. The y/y ex-energy however was a multi-year high. French consumer confidence for the month of June fell to -46, its lowest level since 1987. With the exception of one sub-component all components posted declines in June, with the largest declines seen in the standard of living and personal financial situation components. The first of the German state CPI readings seemed to support European inflation worries as the y/y reading both
Saxony rose to its second highest levels since the early 1990's. Elsewhere the Icelandic y/y CPI reading followed its upward path reaching the highest level since August of 1990.

·The Bank of England's testimony on inflation didn't yield anything new. The testimony seemed to reconfirm that inflation is seen breaking the 4.0% mark in 2008, and highlighted the MPC's confusion about how to deal with the situation.

·The Icelandic CPI further confirms the economic instability that has plagued the country in recent months. While there aren't any official estimates for the outcome of the July 3rd policy-setting meeting there is increasing speculation that further action will be necessary for the bank to combat inflationary pressures.

·In the FX markets dealers were focusing on comments made by a Russian central banker earlier on in the session. Dealers said that a wider Ruble band suggests that there will be less EUR/USD buy operations for the time being as the central bank does not have to maintain a basket, and can let the Ruble appreciate.

·Comments from the Libyan oil official overnight seem more spiteful than anything, but, airing on the side of caution, one should note that
Libya is responsible for production approximately 1.75M barrels of oil today, approximately 5.4% of OPEC's daily output.


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