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Tuesday July 15, 2008 - 11:27:09 GMT
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Forex Blog - European Market Update: German ZEW Hits All Time Lows; Equities Slide as Fear Mounts


·UK June RICS House Price Balance: -88% v -94. 0%e

·UK June BRC SSS: -0.4% v 1.9% prior

·UK June BRC All Sales: 2.1% v 4.6%

·FR June Business Sentiment: 95 v 96e || Prior revised from 97 to 96

·FR May Current Account: -€2.5B v -€3.0B prior

·UK June CPI: M/M 0.7% v 0.4%e || Y/Y 3.8% v 3.6%e || Core Y/Y: 1.6% v 1.5%e

·UK June RPI: M/M 0.8% v 0.5%e || Y/Y 4.6% v 4.3%e || Ex-Mortgage Y/Y: 4.8% v 4.4%e

·UK June Retail Price Index: 216.8 v 216.0e

·GE July ZEW Economic Sentiment: -63.9 v -55.0e

·GE July ZEW Current Situation: 17.0 v 32.9e

·EU July ZEW Economic Sentiment: -63.7 v -56.0

·SP Q2 House Price Index: Q/Q -0.1% v -0. 2%e || Y/Y 2.4% v 1.9%e


·In sector rotation overnight the European oil sector was cut to Neutral from Overweight at Lehman. In equity news Burberry [BRBY.UK] reported Q1 revenue of £211M, above consensus estimates of £195M, noting that brand momentum is strong. BT Group [BT.UK] suspended its buyback program from July 31, and reaffirmed its dividend forecast. The company plans a £1.5B broadband investment program Jessops [JSP.UK] said overnight that trading has not improved. The company cut its forecasts noting that it sees both EBITDA and Pretax lower than forecasts. Jessops reported 3-week SSS -11% y/y, and 41-week SSS -5.7% y/y.

·In the newspapers overnight La Repubblica reported that Telecom Italia [TIT.IT] will be probed by Brazilian authorities in a bribery investigation. According to the Business Standard Lafarge [LG.FR] is seeking to allocate $1B for its Indian expansion plans. The Wall Street Journal took a look at the government's plans for Fannie (FNM) and Freddie (FRE) in the Heard on the Street section overnight. The article note that dilution fears and concerns about government intervention could weigh on any future share sales by Fannie and Freddie. The article notes that it is most likely that the government will seek to take a direct stake in the GSEs through a preferred issue with special rights because this will maintain the perception that the two companies are still owned by its shareholders. If the government acquires shares in the GSEs, it could seek to be paid a lower than market interest rate or defer payments until the companies are in better financial condition. The article notes that the Treasury still needs to address the capital issue of Fannie Mae and Freddie Mac because if it does not funding could again become an issue and possibly force Paulson to come up with an actual nationalization plan. According to El Confidencial BBVA [BBVA.SP] has pulled out of bidding for Dresdner [ALV. GE] The NY Post wrote overnight that Lehman (LEH) is looking hard at taking the firm private. The article said that “CEO Dick Fuld is seriously mulling a way to take itself private and out of the public eye, The Post has learned." "According to sources, talks internally centering on privatizing Lehman have gotten very serious consideration after a blistering onslaught of rumors and questions about the firm's solvency have caused the venerable bond shop to shed more than 79 percent this year. "

·All was quiet on the energy front overnight. Chevron (CVX) announced overnight that it has repaired the 120K bpd Escravos crude pipeline in
Nigeria, noting that output has been fully restored. A Saudi Oil Official said overnight that the country is currently pumping around 9. 7M bpd in July, adding that there are no plans to raise the output level in August. The official added that the country could Sustain oil output of 12. 5M bpd for as long as the market needs.

·There was no new supply overnight.
Germany announced that they will auction a new July 2040 bund on July 23rd, citing capital market developments. The yield spread between the 10-year bund and the 10-year OLO widened to its highest level since March of 2006 overnight after the Belgian Prime Minister tendered his resignation to the Belgian King.

·In the currencies the USD remains broadly lower in the European session as concerns continued to swirl in the
US financial sector. Dealers noted that the nagging thought of which financial institutions might be too small to save hampered the USD overnight. The EUR/USD hit all-time highs above the 1.6030-level as oil and Gold maintained a firm tone. NYMEX crude was above $146 and Gold moved back towards $1,000/oz. Risk aversion helped to send the CHF and JPY broadly higher against the major pairs. The USD/JPY broke below the 105-level while the USD/CHF approached parity. Elsewhere, the Wall Street Journal noted overnight that China's currency controls may complicate the country's inflation fight. The article adds that China's commitment to fast growth will also make it more difficult to lower inflation.

·On the speaker front the Bank of England's Sentance said overnight that returning CPI to the 2.0% target will lead to a less smooth economy, adding that the rise in inflation is seen as temporary. Sentance said that the MPC still aims to have CPI back to its 2.0% target level in 2 years, adding that policy must reflect inflation expectations evidence. Furthermore Sentance added that demand and output growth will help to cool down inflation. Following the data release a ZEW economist said that higher oil prices and the Euro FX rate hurting German firms. The economist added that the
US slowdown and financial crisis hurting Germany. The economist noted that weak domestic demand seen as an additional hurdle. The German Deputy Finance Minister said overnight that 1.7% GDP growth is realistic in 2008, adding that slower export growth and rising inflation to impact GDP growth.

·*** NOTES ***

·The European indices were lower across the board overnight as higher commodity prices continue to impact companies' margins creating earnings uncertainty as we head into earnings season. General uncertainty regarding the financial sector outlook was also weighing down on equities overnight. On the data front the UK CPI was off the charts, as was widely expected with the y/y reading making replacing last month's reading as the highest level since June of 1992 at 3.8%. In
Germany the ZEW economic sentiment reading fell to its lowest level since records began in December of 1991; the Euro-Zone economic sentiment did the same, however records in the Euro-Zone only began in December of 1999. Following the release ZEW economists noted that higher commodity prices and the Euro FX level are hurting German firms.

·Treasury Secretary Paulson said a few days back that financial firms must be allowed to fail, yet despite this the US Government has made a move to help ameliorate the perilous state that its beloved GSEs Fannie Mae and Freddie Mac have found themselves in.
US officials have tacitly drawn the line between which institutions are important enough to save, and which institutions are disposable. PIMCO's Bill Gross put it best when he said “we have seen a 'too big, too important to fail' instance… the market [now] wonders, which institution is too small to bail out?” And so the question has been posed. Ultimately the answer will not be known until a problem is encountered. The government's response is likely to change on a case-by-case basis. The case of Indymac lends to the belief that regional banks are the potential candidates for the disposable role. As a result there has been an increase in market uncertainty over the general outlook for the financial sector seeming to prompt a run on banks as everyone seeks to protect their assets. (“Too many have dispensed with generosity in order to practice charity.”

Albert Camus)

·Belgian Prime Minister Yves Leterme tendered his resignation to the Belgian King overnight after Dutch and French speaking parties failed to reach an agreement reforming the state by the June 15th deadline. The Belgian King has can either re-affirm his confidence in Yves Leterme, accept his resignation, or give the country more time to reflect upon the crisis. I last wrote about this in November of 2007. The current situation goes to show that very little has changed since then, and the current state of the Belgian Government is both volatile and fragile. This just goes to highlight once again that there multi-tier political system in
Europe. One might question how something like the Lisbon Treaty could ever work when some countries can't seem to get their own political debacles straightened out. Politically speaking, does one size fit all? At the same we can see grand differences in the economic situations and opinions between the countries under the ECB. On the opinion side the disparities are most pronounced between Germany and France (economy #1 and economy #2). On the economic front the disparities are more wide spread with Italian officials forecasting little GDP growth in 2008, and Spanish officials predicting further deterioration in the housing market. Once again we ask, economically speaking, does one size fit all? While the Belgian crisis seems to be of minor consequences, especially considering the lack of publicity and/or attention it has received outside of the Belgian borders, it goes to show that the legs of the Euro-Zone are still weak and not fully developed, and are therefore vulnerable. ("He who would learn to fly one day must first learn to stand and walk and run and climb and dance; one cannot fly into flying." <http://www.quoteworld. org/quotes/12691> - Friedrich Nietzsche <http://www.quoteworld. org/authors/friedrich-nietzsche>)

·After nearly three years of writing this update, and about six weeks until I move to France, I would like to see how many people make it this far when reading the update. Please e-mail me at [email protected] <mailto:[email protected] com> with questions, comments, complaints, or just to say hello. Thank you!


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