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Forex Blog - European Market Update: Mounting concerns over UK sovereign ratings send GBP to 7-year lows; Market to Obama: "Now We'll See"

Today 05:57am

European Market Update: Mounting concerns over UK sovereign ratings send GBP to 7-year lows; Market to Obama: "Now We'll See"


*** ECONOMIC DATA ***

- (JP) Japan Cabinet Report: downgraded its economic assessment for a fourth straight month, citing weak consumption and sharp declines in both exports and production sectors

- (JP Japan Dec Final Machine Tool Orders Y/Y: -71.8 v -71.9 prior

- (JP) Japan Dec Convenience Store sales Y/Y: 6.1% v 7.4% prior

- (CZ) Czech Nov Retail Sales: -6.3% v -3.7%e 

- (IT) Italian Nov Industrial Orders M/M: -6.3% v -4.0%e; Y/Y: -26.2% v -16.7%e 

- (IT) Italian Nov Industrial Sales M/M -3.9% v -3.0%e; Y/Y:-13.9%

- (UK) Dec CPI : -0.9% v -0.8%e; Y/Y: 3.1% v 2.6%e. Core CPI Y/Y: 1.1% v 1.3%e

- (UK) Dec RPI M/M:-1.4% v -1.5%e; Y/Y: -0.9% v -0.8%e; RPI Ex Mortgages Y/Y: 2.8% v 2.4%e 

- (GE) ZEW Survey Econ Sentiment: -31.0 v -43.1e; Current Situation: -77.1 v -71.5e 

- (EU) Euro-zone ZEW Econ Sentiment: -30.8 v -46.0e 



*** SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM ***

- Equities: TomTom [TOM2.NV] Lowered its FY08 revenue forecast to €1.66-1.68B range compared to consensus estimates of €1.78B. The firm previously guided in a range of €1.75-1.85B. It placed its net debt at €1.11B at end of 2008 and noted that FY08 EBITDA margins were seen around the 19-20% area. Firm noted that it can no longer support the full valuation of Tele Atlas assets ||Burberry [BRBY.UK] Provided trading statement: Q3 Sales £329M above £291M expectations, SSS -3% y/y. Firm guided FY08 pretax in line with prior expectations. There was double-digit comparable store sales growth in both Europe and Asia Pacific, with strong performances in the UK, Italy, Korea and Hong Kong. || Alstom [ALO.FR] Reported Q3 revenues of €4.56B just below expectations of €4.67B. The quarterly orders €6.12B were above the €5.40B consensus. Booked orders amountied to €21.5B (+8% y/y) || Fiat [F.IT] Dep Chairman Elkann confirmed that the firm is holding discussions with Chrysler (private)|| Daimler [DAI.GE] Reportedly still trying to dispose of its 19.9% stake in Chrysler LLC and welcomes any initiative that would stabilize Chrysler and preserve jobs || JD Wetherspoon [JDW.UK] Reported 12 week SSS +2.6% and cancelled its dividend as it sought to substantially reduce capital expenditures || Kesa [KESA.UK] Reported H2 like-for-like sales down 5.5% y/y while group revenue rose by 11% y/y ( ex FX -2.2% y/y). It gross Margins were lower by 1.7% y/y || Invensys [ISYS.UK] provided interim management report in which it saw H2 trading in line with H1 performance || IG Group [IGG.UK] Reported H1 Pretax £58.2M compared to a single estimate of 63.0Me. Revenues were Rev £126.5M above the €115.0M (1 est). The firm completed acquisition of FXOnline Japan in Oct of 2008. Trading conditions across all our markets for important peak period were very tough with further deterioration seen in Continental Europe. || Air France [AF.FR] Stated that it saw a Q3 Operating Loss as likely but added that results were dependant on economic conditions . The firm expected to make FY08/09 operating profit || De La Rue [DLAR.UK] Provided interim management statement in which it saw Q3 trading in line with expectations. Currency activities have remained strong with the order book having strengthened year on year || Dragon Oil [DGO.UK] Provided fiscal year update in which it a Achieved 28% increase in 2008 gross production with avg daily rate of 41K bpd v 32K bpd y/y . it targets 15% increase in average daily production rate for 2009 || Land Securities [LAND.UK ] Provided interim management statement in which its focus remaind on balance sheet management and property leasing || Continental [CON.GE] Reaffirmed its FY08 revenue guidance of €25B, the same level provided in late Oct. || Bilfinger Berger [GBF.GE] Consortium awarded selected to expand M80 highway to the North of Glasgow with the deal valued at €340M || BMW [BMW.GE] Stated that overall market conditions remain difficult and noted that some 26K workers would be placed on shortened shift in the Feb and March period||


- Speakers: German Fin Min Steinbrueck expressed continued concerned about financial sector as confidence wanes. He noted that Europe must pursue policies aimed at softening recession and added that one cannot stop the recessionary forces but could limit its impact. The second German stimulus package was received positively || German Econ Min Glos Affirmed recent EU forecasts and saw 2009 GDP contracting around 2.0% to 2.5%. Hopes that the financial market crisis would have l run its course by H2 of 2009 || SNB's Roth commented that the Swiss economy could contract by 0.5% to 1.0% in 2009 and did not expect a recovery until 2010 || The German ZEW embers commented that the second German stimulus package has helped regain confidence and that the lower interest rates enacted by the ECB would stabilize the economy. It noted that many analysts see an improved outlook by mid 2009 | ZEW's Schmidt: Construction sector looking more positive 

|| Polish Central Banker Wasilewska-Trenkner noted that if monetary policy council opted to lower interest rates, moves should be larger than 25 bps. He noted that it would be very cautious with interest rate cuts not to increase Zloty weakening || HKMA Yam noted that the announced currency FX swap with China's PBoC would keep business conditions stable. He did note that China still maintained controls over currency exchange rates . Lastly he saw no time table for settling trades in Yuan at this time || ||EU's Juncker commented that he was concerned that US' stimulus plan could create a huge debt pile up || Russia Fin Min Kudrin stated that the country would have significant budget deficits in both 2009 and 2010 || BOJ Jan Cabinet Report: reiterated view that warning that the Japanese economy could deteriorate further if the financial crisis deepens and stock and currency markets stay volatile. It lowered assessment on exports and industrial production, saying that they were falling "very substantially". It cuts its view on private consumption to "in a weak tone" and downgrades Imports, housing and consumer spending sectors. 


- In Currencies: Today's session was all about the British Pound. The GBP/USD tested below the 1.40 handle for first time since July 2001 while GBP/JPY continued to hit fresh life-time lows as it tested 126.60. Dealers noted comments from EU Commission that the bank-rescue programs, which could push Britain further into debt, complemented with falling tax revenues. The EU forecasted that the UK could hit a 2.8 %of gross domestic product in the financial year that ended in April 2008 and up to 5.7% in the current financial year. The Commission predicted Britain's deficit would reach 9.5% in 2009-2010. EU's comments prompted dealer chatter that a possible sovereign downgrade of UK debt by a rating agency could occur very,, very soon. || EUR/JPY pair managed to hold above the 116.30 support level. Dealers commented that Daiwa launched New World Equity Toshin issue today managed by Fidelity and labeled the combination as a "dominant pairing" as far as Toshins go || Merrill Lynch Analyst: Comments on FX market noting that the US Dollar might gain against European currencies. The analyst noted that EMU default risk was a major negative for the Euro. It targeted GBP/USD at 1.3200 noting that the UK to be hurt by waning foreign demand for Gilts. EUR/GBP cross appreciation was not justified by interest rate spreads || BNP analyst commented that Euro currency faced significant downward risks, could weaken further after breaking $1.3040 earlier today. || Russian Fin Min Kudrin stated that a gradual reduction in Ruble currency helps negates risks to a broader financial crisis.


- Fixed income: Gilts are sharply lower, with the March contract down 122 ticks to 118.55 at the time of writing, and the cash 10y yield probing 3.6%. The European Yield curve has steepened, with buyers in the short end bringing the yield on the 2y Shatz below 1.5%, whilst the 10y Bund is back above 3% after better than expected ZEW Surveys. European peripherals remain under pressure, with yields on Dutch and Belgian 10y debt reaching record levels over the European benchmark at 76bps and 120bps respectively.



- In Energy: Hungary's MOL stated that no gas received from Ukraine on Monday . The firm has not received any confirmation of gas supply restart. It noted that Hungarian gas consumption dropped yesterday and expected gas use to drop further today || Gazprom [GAZP.RU] Confirmed that firm has begun shipping gas to Europe via Ukraine || Ukraine's Naftogaz: Confirmed that gas was flowing in 'all directions' as gas flowed into Ukrainian pipelines from Russia. The company noted it was 'Doing its best' to ship the product into Europe via the pirpeline.


- Credit Crisis: WSJ "Heard on the Street" column comments on the UK's bank bailout plan, RBS. The article noted that the UK bank bailout scheme noting that if the UK's plan fails, the consequences for the UK economy would be dire. WSJ noted that even if the government's various bank credit guarantee schemes succeed, it will not be able to halt the de-leveraging process. The article noted that the major UK banks have £900B of exposure to commercial and residential property and structured credit, of which £100B is considered as toxic.

- On RBS the WSJ noted that some of the losses are related to goodwill write downs on various RBS acquisitions and these are non-cash losses, which won't have an impact on regulatory capital. About 15% of RBS' £600M loan book was concentrated in UK commercial property. If the UK government decided to convert its £5B of preference shares of RBS into ordinary shares it could save RBS £600M/yr and improve the bank's core Tier 1 capital ratio to about 7.4% versus the 4% regulator's minimum.

- FT LEX column calculated that British banks have £4 trillion assets on their balance sheets some 2.5 times GDP and article noted that it was unsure how many of these effectively needed support. 



*** NOTES ***

- The overall trading environment continues to be focused on global growth concerns, corporate earnings, banking sector, debt downgrades and bond default risk. Chatter of a imminent UK sovereign downgrade in the manner Spain experienced on Monday has weighed greatly on GBP and Gilts. The European data was “mixed” but German ZEW officials continue to note that the economic recovery would begin by the middle of 2009 while most other European officials (including ECB's Trichet) see 2010 as the possible recovery period. 

- A historic inauguration at 12 noon ET time. Obama's campaigned slogan was “Yes we can!!!” now the financial markets say “Now we'll see”

- Looking Ahead: 

- 8:30 (CA) Canadian Nov Manufacturing Shipments M/M: -3.0% expected v -0.5% prior

- 9:00 (CA) Bank of Canada Interest Rate Decision : 50bps cut to 1.00% expected; Current benchmark rate is 1.00%

-11:30 (US) 44th Presidential Inauguration Ceremony commences

 

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