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Monday July 28, 2008 - 12:10:38 GMT
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Forex Blog - European Market Update: German Consumer Confidence Slides; Market Gears up for Second Week of Big Earnings


·GE Aug GfK Consumer Confidence: 2.1 v 3.5e || Prior revised from 3.9 to 3.6

·SP May Mortgages-Capital Loaned Y/Y: -36.5% v -13.1% prior

·SP May Mortgages on Houses: -36. 2% v -9.4% prior

·SP May House Transactions: -34.3% v -7.1% prior


·In equity news overnight Ryanair [RYA.UK] reported a Q1 pretax loss of €90.5M, below the loss of €50.9M expected and revenue of €777M, below estimates of €865M. Ryanair's passenger traffic rose to 15M passengers from 12.6M in Q1 of last year. The company said that it is hedged at 80% for Q3 at $124/barrel, and noted that it is unhedeged for Q4. (Shares were down over 20% in early trading).
Informa [INF.UK] reported 1H net income of £46.5M, down from £68.7M a year ago, operating profit of £77. 7M, up from £74.8M a year ago, and revenue of £627.6M, up from £532.5M a year ago. The company said that trading remains in line with prior expectations. (Shares were down over 1% in early trading). Banco Bilbao Vizcaya Argenta [BBVA.SP] reported Q2 net income of €1.16B, below estimate of €1.49Be. The company's 1H loan default ratio was 1.15%, up from 0.86% a year ago. (Shares were down around 1% in early trading). BAE Systems [BA. UK] offered to acquired Detica [DCA.UK] for 440p/share in cash, in a deal valued at £531M. The offer price represents an 18.2% premium to Friday's closing price. (Shares were up over 15% in early trading). TNT [TNT.NV] reported Q2 net income of €205M, below expectations of €224M. Operating income at €324M was shy of the €350M consensus, while revenue of €2.81B was roughly in line with expectations. The company said that they see their FY08 results at the lower end of the previously issued forecast, and will decide on buyback following refinancing bond redemption. (Shares were down over 5% in early trading). Reckitt Benckiser [RB.UK] reported Q2 net income of £240M, in line with consensus expectations, and pretax of £315M, just above the £311M consensus. Revenue of £1.65B was in line with expectations of £1.63B. The company's gross margin ws 58.3% up from 57.6% a year ago. Reckitt noted that they are on track to meet their FY08 targets. (Shares were up over 2.75% in early trading) Pearson [PSON.UK] reported H1 pretax of £55M in line with the £54.2Me consensus, and revenue of £1.97B, above estimates of £1.84B. The CEO said that he is confident that 2008 will be another record year. Pearson confirmed its FY08 guidance. (Shares were up nearly 3% in early trading). IBM (IBM) announced overnight that it will acquire ILOG [ILO.FR] for €10/share in cash in a deal valued at €215M. The offer represents a 37% premium to Friday's closing price. (Shares were suspended) HomeServe [HSV.UK] said in a trading update overnight that Q1 results are ahead of last year, and are in line with forecasts. (Shares were up nearly 3.5% in early trading).

·In the newspapers Sueddeutsche Zeiting wrote that Infineon [IFX.GE] is mulling the sale of all or part of its 77.47% stake in Qimonda (QI). WestLB's Chairman said in Focus that the bank is close to finding a merger partner. Potential merger partners include Landesbank
Berlin, LBBW, BayernLB, DekaBank, HSH Nordbank or Helaba. According to Sonntag the Verband der Automobilindustrie (VDA) said that German car makers may raise prices in the future due to higher steel prices. The Telegraph reported overnight that Taylor Nelson [TNS.UK] is seeking a merger partner in order to avoid a hostile bid by WPP Group [WPP.UK]. According to the Independent BP [BP.UK] may examine legal options against its Russian partners in TNK-BP. The Financial Mail wrote overnight that, due to market conditions, RBS [RBS.UK] may cancel the sale of its UK insurance unit, which is thought to be valued at around £7.0B The Telegraph wrote overnight that Barratt Development [BDEV.UK] is talking with UK banks, including HBOS [HBOS.UK], regarding potential real estate joint ventures. The Wall Street Journal commented on the SEC's probe regarding rumors related to Lehman (LEH) overnight. The article noted that the SEC is placing its attention on 4 rumors regarding Lehman. Subpoenas have been issued to dozens of hedge funds requesting transcripts of phone conversations, messages and payroll documents that mention or include the Fed's lending facility, Barclays PLC, SAC Capital and PIMCO.

·In energy news overnight Royal Dutch Shell [RDSA.UK] confirmed that there was an attack on its Nembe Creek Truck pipeline in Niger Delta (130K B
PD) facility.

·In new supply overnight
Italy sold €2.5B in zero-coupon April 2010 bonds with an average yield of 4.584% and a bid-to-cover of 1. 66x. The Times wrote overnight that, according to a report by Deloitte, the UK is nearing a recession, which could rival the one seen during the early 1990s. Deloitte has warned that UK house prices will fall by a third by the end of 2010. Deloitte's economic adviser, Roger Bootle, said the recent fall in the value of sterling ought eventually to help exporters and thus rebalance the economy away from consumer spending. But he added that 'The lower pound will not prevent the economy from slowing sharply as steep falls in house prices, a squeeze on real incomes and the credit crunch hit domestic demand.' According to the Secretary of State for Tourism, speaking in an interview with El Mundo, tourist spending in Spain may decline by the end of 2008 despite the rising number of visitors. The official noted that the hotel and leisure industry is not immune to an economic slowdown.

·In currencies the USD was mildly softer against the Euro, Swiss, and yen related pairs as oil moved higher on renewed supply concerns following an attack on a Nigerian pipeline. The EUR/USD was trading around the 1.5730 area after MEND militant rebels stated that they attacked two Royal Dutch Shell pipelines in the
Niger delta region. FX dealers ignored the multi-year low in the German GFK confidence survey. The USD was a touch firmer against the GBP as the pair maintained a foothold above the 1. 9820 key pivot point. The EUR/JPY pair within striking distance of fresh all-time highs, but dealers continued to note an option barrier at the 170- level.

·On the speaker front the president of the Minneapolis Fed, Gary Stern, said in an interview with the Financial Times overnight that the credit squeeze in the
US is likely to persist for many months and might even get worse. Stern noted that with rates at 2%, the Fed is well placed to cope with any negative surprises on growth. Stern added that the Fed is not as well positioned to deal with any negative surprises on inflation. Stern said that without any such surprises, real rates are at levels that, if sustained for too long would not be compatible with medium term price stability. Stern said that either inflation expectations need to decline, or the Fed will have to raise rates, or both, in order to achieve the required tightening in real rates.

·*** NOTES ***

·With little economic data on the cards, and no European officials stationed behind the podiums, the final week of July commenced at a slow and boring pace. Fear not my friends as the pace is set to pick up speed tomorrow; Tuesday will be ushered in by economic data, bond auctions, trumpets and all. Given the lack of overly significant events overnight, at least in my mind, I would like to take a moment to share a quick, broad glance of the Spanish economy. Spanish consumer confidence declined to the lowest level in its (short) history at the beginning of the month, with each and every one of the sub-components posting a decline from the prior month. Declines under the current situation component outweighed those seen in the (future) expectations component, however not by very much. In the second week of July the June consumer price index rose to its highest y/y level on record. This is not a major feat considering that records only began in 2002 because a new and improved statistical measure was adopted. Similarly the harmonized CPI reading was also at all time highs towering above the 3.4% lifetime average at 5.1%. Core CPI was tame compared to the general CPI reading, however the core CPI retouched its second highest level since late 2002. The Y/Y reading on June producer prices rose to 9.0% their highest reading since February of 1985 boosted by higher commodity prices. Last week the Spanish unemployment rate posted its fifth consecutive quarterly gain, moving back to levels not seen since Q4 of 2004. Inflationary pressure, weaker growth, and declining sentiment have all been coupled with less optimistic comments from Spanish officials. Last week, for instance, the Spanish government cut its 2008 GDP growth forecast to 1.6% from 2.3%. Spanish Finance Minister Pedro Solbes said that the ECB's recent interest rate hike is having an impact on Spanish growth, and later said that he expects Spanish inflation to rise further. While the weak state of the Spanish housing sector, and the slow deterioration of
Spain's economic outlook are no secret one must ask how bad can the picture get? While the Spanish economy may have (a good few years back) had an economic picture with a linear structure similar to that of a cubist painting, its structure now resembles something more in the vain of abstract expressionism (think Jackson Pollack). European officials have acknowledged Spain's situation. The ECB's Trichet, for instance, said mid-July that the ECB will not alter its policies to help Spain (and Ireland), noting that policy must be optimal for all areas. S&P warned that credit default swaps in Spain (amongst other EU countries) are on the rise and risk rising further as the economy is under-performing its brother and sister economies. As I've mentioned many times before it is worth questioning how long a one-speed monetary policy can be sustained before the governed economics shift in different directions and the whole thing doesn't make sense anymore. The possibility exists for everything to pan out perfectly as time progresses, but its strikes me as being highly unlikely given developments over the past couple of months. With all of this in mind the Euro-Zone CPI estimate is due out later this week, and is expected to rise to a new all time high. While the ECB is expected to hold rates at next week's meeting, the hawkish rhetoric over the past few weeks could have negative implications for Spain if the ECB strikes into action. Continued gains in the CPI estimate and related measures may spark an ECB rate hike in the near term if declines in M3 are not sustained.

·“It is better to fail in originality than to succeed in imitation” - Herman Melville


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