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European Market Update: ECB's Wellink Maintains Hawkish Position *** ECONOMIC DATA ***
Zew Expectations: -76.9 v -67.0e
Â·IT May Total Trade Balance: -â‚¬59M
v -â‚¬1.0B prior || Prior revised from -â‚¬1.0B to -â‚¬1.02B
Â·IT May Trade
Balance EU: â‚¬1.71B v â‚¬770M prior || Prior revised from â‚¬770M to
Â·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%
Â·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.
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%.
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
Â·In new supply overnight Spain sold â‚¬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 â‚¬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 â‚¬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 ÂŁ3.75B in 5.00% 2012 bonds with an average yield of 4.91% and a
bid-to-cover of 1.65x.
Â·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.
Â·*** NOTES ***
Â·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 â€śVolker style inflation fighting
tacticsâ€ť 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
Â·â€śIt is not enough that thought should seek to
realize itself; reality must also strive towards thought.â€ť - Karl
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