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Wednesday April 22, 2009 - 10:09:50 GMT
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Forex Blog - European market Update: All eyes on UK budget; UKdeficit set to exceed 11% of GDP

Today 05:55am EST/09:55am GMT

European market Update: All eyes on UK budget; UKdeficit set to exceed 11% of GDP


- (CH) China Mar Wholesale Prices Y/Y: -6.6% v -6.0% prior 

- (DE) Denmark Apr Consumer Confidence Indicator: -4.4 v -10.5e

- (NE) Netherlands Apr Consumer Confidence Indicator: -28 v -33e

- (TT) Taiwan Mar Unemployment Rate: 5.7% v 5.8%e

- (UK) BoE Minutes: Voted unanimously to keep interest rates at 0.50% and maintain £75B APF program

- (UK) March Claimant Count Rate: 4.5% v 4.6%e; Jobless Claims Change: 73.7K v 116.0Ke

- (UK) Feb Avg Earnings inc Bonus: 0.1% v 1.4%e; Ex Bonus: 3.2% v 3.4%e

- (UK) Feb ILO Unemployment Rate: 6.7% v 6.7%e

- (UK) Manufacturing Wage Unit Cost 3M/Y: 10.0% v 8.9% prior

- (UK) March Public Finances (PNSCR): £28.4B v £18.0Be; Public Sector Net Borrowing: 19.1B£ v £15.5Be (highest readings on record)

- (UK) March Preliminary M4 Money Supply M/M; 0.0% v 1.2%e, Y/Y: 17.6% v 19.2%e

- (EU) Euro-zone Govt Debt/GDP Ratio 2008: 69.3% v 66.3% prior


- Equities: European equity markets opened to the downside following mixed pre-market trading on some bearish corporate earnings news. Most significantly, Pugeot (UG.FR) released its Q1 sales figures that were broadly in line with expectation but still showed a 25% decline in revenues y/y. Auto names opened strongly to the downside in
Paris and Frankfurt. Lower than expected earnings out of Nestle (NESN.SZ) and the failure of Avastin to reach its primary end points took Roche (ROG.SZ) to the downside on the open. With a light data and speaker series in the European pre-market, markets floated off their worst levels by 4:00EST awaiting further direction. Traders continue to await the expected UK budget that could come in anywhere from £160B to as high as £200B in shortfall. Specifically, expect to see the FTSE100 position itself ahead of these numbers. Financials, however, continue to outperform the broader market following the US turnaround in the NY afternoon yesterday (financial segment of INDU closing up 7.50%). Markets moved positive within 1-hr of trading as automotives came off their worst levels and financials continued their outperformance. Equity markets digested mixed economic data out of the UK at 4:30 rallying to their then session highs (+0.50% across the board) just past the 5:00est hour on solid volumes. Expectation beating Q1 results out of VW (VOW.GE) pushed the German auto names higher simultaneously. 

- RioTinto [RIO.UK] CEO Iron Ore Unit Sam Walsh: Saw no deferrals from customers, continues hiring for
Iron Ore division, sees signs of stimulus package working in China. || Peugot [UG.FR] Reports Q1 Sales €10.97B v €14.76B y/y (-25%); Confirms that group expects FY09 loss, Q1 automobile sales 8.7B v 11.3B y/y (-23%). ||Nestle [NESN.SZ] Reports Q1 CHF25.2B v CHF26.0Be; Confirms 2009 outlook (FY09 organic growth at least +5% y/y), Q1 growth outside of acquisitions stood up 3.8% y/y. ||Roche [ROG.SZ] Reiterates DNA acquisition to be accretive to earnings in first year - conf call. Notes Phase III C-08 Study of Avastin study was overhyped, with only 50% chance of success. || Heineken [HEIA.NV] Reports Q1 Rev €3.05B, up 24% y/y; organic revenue -1% y/y, Q1 consolidated beer volume +12% y/y, organic volume -6.3% y/y. The decline in organic volumes were due to lower volumes in Europe and the Americas. ||Volkswagen [VOW.GE] Reports Q1 Pretax €52M v loss €687.3Me, Net €243M v loss €419Me, Op Profit €312M v Loss €328Me , Rev €24B v €23.3Be. Sale of Brazilian truck unit added approx €600M to earnings, net liquidity in automotive unit at €10.74B (-24.5% y/y). ||

- Speakers: ECB's Stark reiterated the central bank view that a gradual economic recovery in 2010. he noted that fiscal sustainability could be pressured by debt and deficit. The economic and financial crisis should not lead to increase stimulus measures. He stressed that the ECB's policy transmission remains via the banking system || ECB's Notwotny commented that one needs sustainable medium term budget policy for restoring confidence || French PM Fillon commented that a 2.5% contraction in 2009 likely, recovery in 2010 possible || China to increase vehicle subsidies to CNY1.0B from CNY600M prior - Ministry || Japan MOF official: Deterioration in G7 economies is easing, but cannot be optimistic about economic outlook, USD remains global reserve currency. Expected discussion of US bank stress tests at this weekend's G7 Finance Minister meeting in Washington DC. || South Korea not planning another extra spending package stated its Fin Ministry. The job market remained weak as joblessness remained high. The minister noted that now is not the time to tighten liquidity || Bank of Spain denied it has identified 7 troubled banks || PBOC Dep. Governor Yi Gang: Economy hit bottom in Q4…. Goldman Sachs raised its forecast for China's 2009 GDP to 8.3% from 6.0% prior. Goldman also raised its 2010 forecast to 10.9% from 9% prior. || German Dep Fin Min says G7 to discuss currencies at this weekend meeting; does not expect any surprises || Russian Fin Min Kudrin commented that he expected reserve fund to be nearly exhausted in 2010 || German Institute forecasted 2009 GDP to contract by 6.0% and 2010 GDP contracting by 0.5%

- In Currencies: a minor bout of risk aversion greeted the European morning but price action mellowed out as the early hours drifted by. All eyes on the UK budget expected out later today. 

- The USD was mixed against the majors. EUR/USD continued to find support at the 1.29 level and dealers continue to express that the 1.2950 area remains a magnet for price action due to option-related plays this week. 

- The GBP was weaker ahead of the UK budget. There was a slew of UK data and dealers seemed to focus on the March Public Finances, which came in worse than expected and at their highes levels on record. Dealer also noting that volatility in GILTS and GBP could pick up significantly depend how close the actual UK budget numbers come in. Dealers noting that the expected shortfall in the UK budget seen around the £160B area, which would represent a 11% of GDP. This compares to the 8% forecasted by Darling last November. GBP/USD was off over 120 pips ahead of the NY morning and probing the lower end of the 1.45 neighborhood. EUR/GBP near 0.89, up over 70 pips from its Asian open. 

- Fixed income: Gilts have been under significant pressure ahead of the UK budget, with the Debt Management Report respected to increase issuance to as much as £200B this year, an increase of over £50B from the November pre budget report. Bunds have held up comparatively well on technical buying , whilst Treasuries have remained firmly in positive territory ahead of US Feb House price data, expected to decline to -0.7% from 1.7% in Jan.

- In Energy: WSJ "Heard on the Street" column comments on the inability of declining oil prices to produce a positive US GDP impact, which it attributed to fewer drivers on the road from rising unemployment. The article also noted that credit spending is being hampered by the financial crisis and "memories of oil price spike" || Reportedly Iran is ready for constructive talks on its Atomic issue

- In the papers: WSJ discussed the impact of the Obama administration's proposals to tax offshore profits. Article noted the impact might have a sizable impact on the likes of Pfizer Inc., Cisco Systems Inc., Coca-Cola Co. and Hewlett-Packard Co., which shelter tens of billions in income offshore annually. Under current law, U.S. companies can defer taxes indefinitely on the profits they say they have earned overseas until they "repatriate" that money back to the U.S. The administration has proposed changing this law, and has already baked in the new tax receipts into its budget figures for 2011. 

*** NOTES ***

- Budget day in the UK. Dealers noting that shortfall expected around the £160B-175B area which is over 11% of GDP versus 8% forecasted by Darling last Nov. budget release later today is likely to show sharp upward revisions of net borrowing estimates as well as significant downward revisions to growth estimates. However, The real market mover could be the Greek budget deficit and the rules underpinning European monetary union. 

- Pace of deterioration in Japan's trade balance stabilizes. The March Trade Balance saw its second consecutive positive total surplus after 5 months of deficits. Could see some nice volatility in GILTS and GBP currency

- China PBOC reiterates that it believes its economy is entering a recovery trend

- ECB Weber maintains the cautious central bank approach. ECB has very limited scope in buying gov't debt, which is not a desirable option. Marginal room for rate cuts as he believes that the lowest interest rate is 1.0%. 

- Credit Swaps Market fall 38% y/y to $38 Trillion, first annual decline in 8 years - International Swaps and Derivatives Association (ISDA) 

- Corporate earning season in full swing. Traders noting the WSJ article discussing President Obama's plans to change law and tax offshore profits of big co's 

- Looking Ahead: Key earnings before the NYSE open include Boeing [BA]; Continental Airlines [CAL]; Freeport Mcmoran [FCX]; McDonalds [MCD]; Altria [MO]; Morgan Stanley [MS]; Northrop [NOC]; Pepsi Bottling [PBG]; St Jude medical [STJ]; AT&T [T]; Wells fargo [WFC]; Wellpoint [WLP]

- 7:00 (US) MBA Mortgage Applications w/e April 17th: No expectations v -11.0% prior 

- 7:30 (UK) Chancellor of the Exchequer delivers Budget Statement

- 8:00 (PD) Polish Mar Net Core inflation M/M: % v 0.2% prior; Y/Y: % v 2.4%e

- 8:00 (EU) ECB's Quaden to speak in Belgium

- 8:30 (CA) Canadian March Leading Indicators M/M; -0.85 expected v -1.1% prior

- 9:00 (US) Treasury Sec Geithner to speak in Washington

- 9:30 (BZ) Brazil March Current Account: -$600M expected v -$591M prior; Foreign Investment $2.5B expected v $1.968M

- 10:00 (US) Feb House Price Index M/M: -0.7% expected v 1.7% prior

- (SA) South Africa holds national Elections

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