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Tuesday October 6, 2009 - 09:54:59 GMT
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Forex Blog - European Market Update: Verbal intervention has limited effect on USD weakness; UK production data falters

Tuesday, October 06, 2009 5:51:52 AM

 European Market Update: Verbal intervention has limited effect on USD weakness; UK production data falters

- (FR) French Aug Central Govt Balance: -€127.6B v -€109.0B prior
- (HU) Hungarian Aug Prelim Industrial Output M/M: -0.7% v -0.7% prior, Y/Y:-19.9% v -18.0%e
- (SZ) Swiss Sep CPI M/M: 0.0% v 0.1%e; Y/Y: -0.9% v -0.8%e
- (RU) Russia Sep CPI M/M: 0.0% v 0.1%e; Y/Y: 10.7% v 10.9%e; Core M/M: 0.5% v 0.5%e
- (UK) Halifax House Prices M/M: 1.6% v 0.6%e; 3M/Y: -7.4% v -7.8%e
- (UK) Sept New Car Registrations at 367.9K units, +11.4% - SMMT
- (UK) Aug industrial Production M/M: -2.5% v 0.2%e; Y/Y: -11.2% v -8.7%e
- (UK) Aug Manufacturing Production M/M: -1.9% v 0.3%e; Y/Y: -11.3% v -9.3%e; largest MoM decline since Jan and lowest YoY reading since 1992

- In equities news overnight: Equity markets in Europe opened positive and looked set to continue yesterday's late session rally that was fueled by the better than expected ISM figure out of the US. Internalizing the news flow out of
Asia, which included the first G20 interest rate increase since the beginning of the crisis out of the RBA, equities have maintained positive levels. Disappointing European data, including CPI, industrial production and manufacturing production data put equities on a downward trend through 3:00EST. Markets refused to slip below the unchanged mark, in continued verbal USD support, various Gulf and Russian authorities scrapped speculation that the USD would be scrapped in the pricing of oil. UK Halifax home price numbers outperforming and the announcement by SocGen [GLE.FR] that it would be holding a capital raise to pay back state holdings, returned risk prone trades on the expectations of improving financial and credit markets. SocGen's action, follows that of French rival BNP Paribas [BNP.FR] on Sept 29 and is in-line with a research note out of JP Morgan released yesterday, predicting $78B in capital raising in the Euro Banking sector. Financial sector names took further lift from analysts at BoA/Merrill Lynch raising the sector to out-perform. Markets surged to the upside after 5:00EST following a further leg up in basic resource names, a slide in the USD and continuing easing of the 3-month Euribor fixing rate. EuroStoxx50 sector movers are led to the upside by financials, industrials and basic resource names.

In individual equities: SocGen [GLE.FR] Seeking to raise €4.8B via rights offering (about 15% of market cap). Existing holders to be offered new shares at discount price of €36/share in 2 for 9 offer. €3.4B of proceeds to be used to repay state aid. || Tesco [TSCO.UK] Reports H1 Pretax £1.57B v £1.40Be, Rev £30.4B v £28.2Be, UK LFL Sales (ex Petrol) +2.7%, declares interim dividend 3.89p/shr (+9% y/y). || Royal Dutch Shell [RDSA.UK] May sell
New Zealand refinery and retail assets to TPG - New Zealand Press. The total deal may be worth as much as NZ$1B. || Total [FP.FR] Firm in JV with GDF to take 25% stake in Khvalynskoye Gas field for $1B. || Bilfinger Berger [GBF.GE] To acquire MCE Group; Announces rigths offer at 1 for 4; subscription price €30.60/share (35% discount from Monday's close). || Analysts at BoA/Merrill Lynch raise European Banking sector to Overweight from Neutral; Expect 'new normal' to remain profitable. ||

- Speakers: Saudi Central Bank: Press reports about replacing USD in oil trade are "absolutely incorrect" || Russian Dep Fin Min: Did not discuss shift in USD's role in oil trade || ECB's Sramko commented that he didi not have problem with current currency rates and would prefer if speculators has less influence on FX || Japan Fin Min Fujii reiterated his view that currency markets price action did not act 'extremely abnormal' but would be open to currency intervention on "Outrageously Reckless" price movements. He also noted that deflation was a concern as Japanese consumers cut spending || IMF's Deputy Managing Director Kato commented that JPY strength reflected economic fundamentals || Portugal Fin Min commented that the Euro FX rate did not reflect fundamentals but noted that the current rate was not a threat at this time but must be watched. He stated that currency volatility could be more damaging than actual level. Forecasted 2010 Euro-Zone GDP in a range of 0.3% to 0.5%and must be ready to support economy until 2011 period. Still saw deterioration in job market for some months to come and added that interest rates should stay at level that supports economy with no strong argument for change in ECB policy mix || Text from Treasury Sec Geithner speech noted that global conditions remained fragile and must implement critical agenda to sustain recovery. Must begin to preparations for cooperated exit strategies and pursue additional liberalized trade treaties. Cannot return to 'bumpy' growth nor rely on US consumers. IMF needs to guard against economic bubbles while the World Bank must focus on firmer foundation for sustainable growth || China PBoC Vice Gov noted that China economic measures have ceased economic decline but the emerging global economic recovery to be gradual || German Gov Officials: See GDP contraction of between 4.0 to 5.0% in 2009 (in line with Bundesbank's forecast given yesterday) || China Fin Min Xuren commented that it would continue with moderate loose monetary policy as economic recovery remains unbalanced ||

- In Currencies: As the saying goes "The pen is mightier than the sword" and the UK paper Independent show how effective it could be. Following the front-page article entitled "The demise of the dollar" a string of verbal intervention ensued throughout the European morning that halted the USD's slide but retracement has been limited. Various officials denied the London Independent front page article headlined "the demise of the dollar". Saudi's Chief Central Bank noted that press reports about replacing USD in oil trade were "absolutely incorrect and he was later joined by a chorus of other Middle Eastern names on the issue with Qatar, UAE, Algeria and Kuwait also denying such secret discussions. EUR/USD managed to hold above the 1.47 level all session and moving towards fresh session highs as the NY morning approached. Some dealers taking note of some names that have yet to come forward to deny the
UK press speculation particularly Japan and Brazil. || Lower-than-expected UK production data hit GBP against the majors with GBP/USD dipping down to test 1.5935 in the aftermath. EUR/GBP above 0.9230 while GBP/JPY slumped below 142 handle. || The EUR/CHF continue to hover just above its 200-day moving average with some press speculation bringing the precarious Latvia financial situation towards the front-burner again.

- In Fixed Income: Treasuries have held up surprisingly well amidst the fallout from the UK independent story, with some modest selling in the short end and some buying of longer dated issues throughout the session, in particular the Long Bond. The flattening move is being replicated in Gilts where unwinds of steepeners sent the 10-year briefly into its lowest yield since April below 3.38%. On top of this, the DMO sold £5B worth of some old 2013's with reasonably good results - the bid to-cover came in just below 2. Bunds have under performed Treasuries and Gilts but peripheral spreads are a touch wider.
Austria sold €2B in 5 and 15y RAGB'a with healthy results.

- In Energy: Kuwaiti Oil Min Ahmed expected OPEC to maintain output at its December meeting and noted that OPEC compliance was slipping a bit. He expressed concern over
Russia's overcapacity in oil production. He saw good demand in Asia and expected improvement in both US and Europe markets over the course of 2010. lastly he added that Kuwait had sustainable oil capacity of 3M bpd || IEA's Tanaka commented that he saw nuclear power representing around 18% of global energy balance sheet by 2030 || World Bank Pres Zoellick noted that oil supplies must diversify economies as reliance on oil and commodities were a precarious basis upon which to build an economy in a world that was struggling to reduce its reliance on fossil fuels ||

- In commodities: Gold moving back towards all-time highs on the back of a weaker USD. The spot metal tested near $1,022/oz before consolidating its gains

- In the papers: London Independent running front page article headlined "the demise of the dollar". According to the article, Gulf countries (along with
China, Russia, Japan and France) are planning to end dollar dealings for oil within nine years. The countries may instead rely on a basket of currencies including the Japanese yen, Chinese yuan, euro, gold and a new currency planned by the Gulf Cooperation Council (GCC). Secret talks have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the plan. || UK Telegraph: Banks brace for Latvia's collapse. Article noted that Baltic states were once again in the eye of the storm after leaked reports that Sweden was bracing for a full-blown economic and political "breakdown" in Latvia.

*** NOTES ***
- One keen FX participant: "While
Middle East countries plot the demise of the USD; perhaps its time the US plots the demise of oil."
UK manufacturing data show that recovery is fragile with largest m/m decline since Jan and lowest YoY reading since 1992
Australia's Central Bank (RBA) comments imply it was a hike based on regional conditions as much as domestic. Market seen a trend in its rate hikes with another 25bps before end 2009 and 100bps more in 1 year time.
- Telegraph: Swedish banks brace for
Latvia collapse.
- UK Tesco's [TSCO.UK] reported smallest profit increase in over a decade
- Societe Generale [GLE.FR] Seeks €4.8B rights offer to repay French State

***Looking Ahead: Key central bank meetings later this week with BOE and ECB meetings on Thursday
- 8:30 (CA) Canadian Aug Building Permits M/M: 5.0%e v -11.4% prior
- 10:00 (CA) Ivey Purchasing Managers Index: 56.2e v 55.7 prior
- 13:00 (US) Treasury's $39B 3 year note auction


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