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Monday October 12, 2009 - 10:14:07 GMT
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Forex Blog - European market Update: Dollar sentiment continued to be weight upon by reserve diversification

Monday, October 12, 2009 5:57:36 AM

 European market Update: Dollar sentiment continued to be weight upon by reserve diversification


- (IN) India Aug Industrial Production Y/Y: 10.4% v 9.7%e
- (GE) German Sep Wholesale Price Index M/M: -0.2% v 0.3%e; Y/Y: -8.1% v -7.7%e
- (CZ) Czech Aug Final Industrial Output Y/Y: -8.4% v -8.1% prior; Construction Output: 0.6% v -4.4% prior
- (TU) Turkish Sep Capacity Utilization: 70.1% v 72.6%e
- (SW) Swedish AMV Unemployment Rate: 5.4% v 5.4%e

- In equities news overnight: Strong Q3 earnings out of Phillips Electronics [PHIA.NV] have pushed FTSE100 and DAX30 indices' to new 2009 highs. Asian trading closed decidedly mixed but these concerns were entirely shrugged off by European equities. Pre-market earnings from Phillips rallied broader tech, electronic and health care names with Siemens [SIE.GE] and Bayer [BAYN.GE] trading higher in sympathy. Equities as a whole were significantly bid throughout the European morning with 2009 highs printed within 30min of trading on the FTSE and then DAX. With light economic and data flows, markets have faced little challenge to the upward progression, and have as such continued to trend higher. Industrial, tech and healthcare names are key outperformers on the EuroStoxx50, but basic materials, health care and consumer goods have also traded broadly higher. Equities are looking forward to a busy Q3 earnings week with highlights in the financial, retailer and technology sector in both Europe and the US expected. Into 5:30EST, equity markets are all trading above 1.0% to the positive side on light trading volumes.

-In individual equities: Phillips [PHIA.NV] Reports Q3 Net €176M v €48Me, Rev €5.6B v €5.5Be. Q3 EBITA €344M v €348Me. Q3 Health care sales +1% y/y. Q3 Consumer Lifestyle -20% y/y. Q3 Lighting -11% y/y. Q3 GM&S -225 y/y. Q3 inventories -1.1% y/y. CEO: 'Remain cautious about the short-term outlook in the absence of structural recovery in the majority of our end markets.' || Xstrata [XTA.UK] Sells 70% stake in El Morru for $465M to Barrick Gold. || Sinclair Pharma [SPH.UK] Reports preliminary FY09 Rev £30.4M v £31Me; Purchases two products from Solvay for €17.5M. || Lloyds [LLOY.UK] Could prevent private equity companies from investing in $79B property portfolio - London Independent. || Barclays [BARC.UK] Seeking to spin off a portfolio of credit assets, which is worth £4B - FT. || Deutsche Telkom [DTE.GE] The merger of the UK mobile units of France Telecom and Deutsche Telekom could be delayed - Guardian. || Man Ag [MAN.GE] Has reportedly replaced majority of truck sales unit -Der Spiegel. || Heidelberger Druck [HDD.GE] Reports prelim Q2 Rev €500M; sees 2009/2010 EBIT -€150M to -€110M. ||

- Speakers: Prime Minister Gordon Brown commented that ending quantitative easing at this time would "imperil" its economic recovery. Confirmed press speculation that the UK Gov't planned to sell £16B on non-financial assets ||German DIW Institute amended its 2009 and 2010 GDP forecasts higher. It now sees 2009 GDP contracting by 5.1% compared to its view of -6.4% back in July. 2010 GDP is now seen rising by 1.3% compared to +0.5% prior. 2009 CPI seen at 0.3% and 2010 at +1.0%. the institute forecasted 2009 German exports at contracting by 15.1% y/y and 2010 at rising by 4.1% y/y. lastly it forecasted Germany's public deficit at 3.1% and at 4.9% in 2010

- In Currencies: The GBP was broadly weaker against the major to start the week as European traders took note of a Centre for Economics and Business Research (CEBR) report which noted that UK interest rates would stay at 0.5% through 2011, and would not rise to 2% before 2014. The GBP/USD fell below the 1.5770 level to test its lowest level since May. EUR/GBP tested the mid-93 handle for six-month highs.

-The USD began the European morning on a firmer note against the major pairs but as the day wore on, the dollar began to wane in sentiment. Dealer concerns about reserve diversification were highlighted by a recent Barclays reports in which nations reporting currency breakdowns put 63% of the new cash into euros and yen in April, May and June period with Emerging markets'' central banks appearing more aggressive than in the past in shifting out of the dollar into other G10 currencies. Barclays noted that new reserves of central banks were comprised of 37% in USD compared to the 63% average since 1999. This seemed to be reflected in the IMF's Sept 30th quarterly report on currency reserves in which the overall USD portion of reserves declined to 62.8% from the 65.0% seen in the prior quarter

- In specific price action, the EUR/USD pair was unable to break below the 1.4670 level where central bank bids were rumored to lurk.

- In Fixed Income: Gilts have performed strongly across the curve after a UK think tank predicted the BoE keeping the official Bank Rate below 2% for another five years. UK PM Gordon's Brown comment that ending quantitative easing would "imperil" the economic recovery and prolong the recession reinforced the sentiment and the entire term structure has compressed by roughly 5 basis points at the time of writing with 2y Gilts around 0.75%, 10y Gilts at 3.40% and 20-year Gilts 3.94%. Some cross market spread trades have dragged Treasury yields lower after Friday's damage, although liquidity is set to be thin today with Chicago closed and any as such gains are likely to be limited. Bunds have ignored the excitement with the 10 year yield currently higher by 2bps at 3.22% amidst a modest equity rally.

*** NOTES ***
- Phillips Electronics [PHIA.NV] beats estimates on earnings
- USD sentiment weighed down by continued central bank diversification
- Trading volumes were light with Japanese holiday and US banking holiday

***Looking Ahead
- 8:00 (IC) Icelandic Unemployment Rate: No estimates v 7.7% prior
- 8:00 (PD) Polish Aug Current Account: €15Me v -€565M prior, Trade
- 15:00 (MX) Mexico July Gross Fixed Investment: -10.5% expected versus -12.7% prior


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