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Thursday July 17, 2008 - 10:58:25 GMT
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European Market Update: ECB's Wellink Maintains Hawkish Position


·SZ July Zew Expectations: -76.9 v -67.0e

·IT May Total Trade Balance: -€59M v -€1.0B prior || Prior revised from -€1.0B to -€1.02B

·IT May Trade Balance EU: €1.71B v €770M prior || Prior revised from €770M to €753M

·EU May Construction Output: M/M 0.2% v -0.8% prior || Prior revised from -0.8% to -0.6% |||| Y/Y -1.1% v -2.4% prior || Prior revised from -2.4% to -1.7%


·In equity news overnight Novartis [NOVN.SZ] reported Q2 earnings of $0.98, above the $0.93 consensus, net income of $2.25B, above the $2.14B consensus, and revenue of $10.2B in line with estimates. Novartis confirmed that it is on tract to achieve record sales and earnings in 2008. Fresenius [FRE.GE] reported Q2 net income of $209M, just above the $206M consensus, EBIT of $428M, above the $419M consensus, and revenue of $2.66B in line with estimates. Blacks Leisure Group [BSLA.UK] reported July SSS +6.1% y/y, and 19-week SSS -5.4% y/y. The company said that it is currently performing in line with expectations. Electrolux [ELUXB.SW] reported Q2 net income of SEK99M, below the SEK131Me consensus, and revenue of SEK25.6B, above the SEK24.7Be consensus. Electrolux sees significant uncertainty in the global economy.

·In the newspapers overnight the Financial Times wrote that butterfly trades in the money market are implying that traders expect banks to be impacted by the credit crunch until 2010. Butterfly trades allow traders to bet on increased stress at the end of the yr and demand for money at the end of a year. The year-end premium on the cost money has tripled in the past 3 months and the 2010 premium has risen by half. The Wall Street Journal reported overnight that the Fannie Mae (FNM) and Freddie Mac's (FRE) rescue proposal could cost tens of billions of dollars. The CBO assumes both will use the Treasury facilities. According to Goldman, the rescue plan will ultimately cost $53B. Cinco Dias wrote overnight that Santander [SAN.SP] is looking to sell its asset management unit. According to Boerzen-Zeitung India's ICICI Bank [ICICIBC.IN] is looking for acquisitions in Germany. Citing sources, Het Financieele Dagblad reported that ING [INGA.NA] will not pursue an offer for Fortis [FORB.BE] for the time being. According to Expansion Spain's ACS [ACS.SP] may seek to sell its 45.3% stake in Union Fenosa [UNF.SP]. The article notes that ACS is also looking to raise its stake in Iberdrola [IBE.SP] from its current stake of under 13%.

·In the currencies the USD was softer against the European pairs as the dollar failed to hold gains achieved in NY trading on Wednesday. Dealers noted that the USD failed to break some notable technical levels as oil fell towards the $132 area. The EUR/USD was currently around 1.5960 with its 200 hour moving average at 1.5804. The GBP/USD was back above the 2.0 handle after holding its 200-day moving average at 1.9950. The Euro maintained a steady tone as the ECB's Wellink noted that he sees no trade-off between inflation and growth, which implies a 1970s-like stagflation scenario unfolding. Carry-related pairs were higher as the global equity markets staged a 'relief' rally. The EUR/JPY was back above the 167-handle and the EUR/CHF cross was around 1.61. The Financial Times noted overnight that some government funds have cut their USD exposure. The articles notes that 1 large sovereign fund in the Gulf has cut its USD-denominated holdings from more than 80% a year ago to less than 60%. China's SAFE has been looking to enter into deals with European private equity firms as a part of a strategy to reduce its USD holdings. By allocating funds to Europe-based private equity firms, China's SAFE could diversify away from the USD, without spooking the currency markets. The article notes that the Qatar Investment Authority is looking to do more deals in Europe than the US. The article adds that behind the scenes, fund officials are questioning the credibility of the Fed and US Treasury in defending the USD and maintaining financial stability.

·In new supply overnight Spain sold €1.974B in 4.10% 10-year bonds with an average yield of 4.744% and a bid-to-cover of 1. 44x. France sold €1.295B in 4.5% July 2012 BTAN with an average yield of 4. 58% and a bid-to-cover of 2.77x, as well as €4.405B in 4.5% July 2013 BTAN with an average yield of 4.61% and a bid-to-cover of 1.41x. In the UK the DMO sold £3.75B in 5.00% 2012 bonds with an average yield of 4.91% and a bid-to-cover of 1.65x.

·On the speaker front the ECB's Wellink said that it is a mistake to think that an economic slowdown will reduce inflation, adding that short-term inflation expectations are changing. Wellink asserted that that inaction will lead to 1970's style stagflation, noting that he is seeing second round inflation effects in wage negotiations. Wellink reiterated that must prevent long-term inflation expectations from taking hold, and said that he sees no trade-off between inflation and growth.

·*** NOTES ***

·The European indices are trading higher following gains in the US after Wells Fargo reported positive results ahead of yesterday's open, oil prices declined as a result of sharply higher inventories data, and the general feeling that perhaps the recent selling was overdone. For the most part all else was quiet overnight due to a lack of significant data. Comments from the ECB's Wellink were interesting. Wellink asserted that it is a mistake to think that an economic slowdown will reduce inflation. Theoretically raising interest rates will slow economic growth, which should lead to a gradual decline in inflation. With Wellink's statement in mind the question is what other options does a central bank have to tackle elevated levels of inflation? Wellink seems to imply that “Volker style inflation fighting tactics” need to be imposed (ie. push the economy into a recession to stop inflation) in order to avoid a 1970's like period of stagflation. With US CPI data out of the way focus will fall upon a number of key earnings this morning including Dow components JP Morgan Chase (JPM), Coca-Cola Co. (KO), and United Technologies (UTX) amongst other highly anticipated, and notable earnings results.

·“It is not enough that thought should seek to realize itself; reality must also strive towards thought.” - Karl Marx


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